Maruti Suzuki’s September quarter results were broadly in line with Street estimates. Revenues fell over 25 per cent, compared to the year-ago quarter, led by a 30 per cent decline in volumes.
The decline in revenues was less as compared to that in volumes, given the improvement in realisations or average revenue per unit. This improvement was on account of price hikes taken by the company to pass on the cost of transition to BSVI vehicles. Net profit, though down 39 per cent year-on-year (YoY) at Rs 1,358 crore, beat estimates, driven by higher other income and lower taxes.
In addition to the slowdown, the country’s largest passenger vehicle maker highlighted that higher costs were among reasons for the lower offtake for the sector. Vehicle costs have increased due to the implementation of safety norms, hike in insurance costs, as well as an increase in road tax in some states. Issues related to financing of vehicles (on account of higher down payments) also affected sales in the quarter. This was the fifth consecutive quarter of dip in volumes for the passenger vehicle segment.
The decline was led by the mini segment sales (14 per cent of sales), which fell 61 per cent over the year-ago quarter. Further, the mini and compact segments, which account for 67 per cent of Maruti’s domestic volumes, were together down 36 per cent in the quarter.
To boost sales of the entry-level portfolio, Maruti had, ahead of the festival season, launched its mini-SUV S-Presso. Further, it also launched a multi-purpose vehicle — XL6 — and indicated that volumes for the two new models had been strong so far.
Volume growth, however, will be the key trigger, going ahead. The company indicated that sales in the festival period so far have been better than last year, with enquiries getting converted to sales — which was not the case earlier.
Higher promotions and the festival demand led to volume gains in October. However, there is little clarity on whether these initial trends will extend beyond October.
R C Bhargava, chairman of Maruti Suzuki, said that heavy discounting and relaxation in lending criteria has improved the demand scenario, but refused to call it a sign of turnaround in India’s auto market.
“Sales in October have been almost equivalent to sales in the same period last year. Therefore, we caught up on some demand on account of the aggressive discounting — at both the retail and dealer level. However, if you ask whether this could be called coming out of woods, I don’t know,” said Bhargava. There are some worrying trends that could lead to higher pressure on profitability. Margins at the operating level came in at 9.5 per cent, down a steep 584 basis points over the year-ago quarter.
Margins are unlikely to get into double digits in the near term, given that pressure to improve volumes continues to weigh on the company. The management, in fact, highlighted that the negative operating leverage — driven by higher fixed costs and lower volumes — was the key reason behind the pressure on profitability.
To minimise the same, it is offering higher discounts and reducing inventory. The company offered heavy discounts on its popular models in September and October, to clear the stock of BSIV vehicles. For its Nexa models, Maruti offered a gallery of offers. Except for the recently launched XL6, there are a variety of schemes in the form of exchange offers, corporate offers, and free extended warranty.
Average discounts for the quarter stood at Rs 25,761, a 37 per cent YoY rise. Despite the higher volumes in October, discount levels, according to the company, continue to be high. Factors that could help cushion the impact on margins are cost reduction and lower commodity prices. The company has highlighted that the ongoing cost reduction efforts are sustainable, and should have an impact on keeping prices under control.
The full impact of the lower commodity costs is expected to accrue in the current quarter. Maruti is better prepared than its peers, given its BSVI-compliant vehicles, stable inventories, and higher share of petrol vehicles.
Given the record discounts, pressure on its entry-level portfolio, as well as higher costs, analysts are not very positive on the company’s outlook. The stock is trading at about 30 times its 2019-20 estimates, indicating that the Street may be ignoring the downside.