Higher discounts and promotion costs hurt Maruti Suzuki's Q3 performance

India’s largest carmaker disappointed the Street with a muted set of results in the December quarter. Volumes were up marginally over the year-ago period and sharply over the September quarter on the back of an aggressive sales promotion and higher discounts.
Realisations, however, did not live up to the Street's expectations, pulled down by a weak mix and discounts. Discounts, which were Rs 23,000 per unit, helped reduce the BS-IV inventory and push overall volume. While the operating profit margin was back in the double-digit territory at 10.2 per cent after the September quarter miss, it was lower than the 11.2 per cent estimated by analysts.
While cost-control efforts and higher capacity utilisation helped, sales promotion and higher overhead costs limited the gains. The management believes that raw material costs, which had cooled in the last quarter, may see an uptick.
The management highlighted that sequential realisations fell on account of lower sales of diesel vehicles and higher volumes in the mini and compact segments. Given the price increase taken recently and lower discounts, realisations are expected to move up in the current quarter.  chart

  Demand trends, so far, have been weak on the back of higher prices, BS-VI transition, and liquidity issues. But there are some positives highlighted by the management. The rural sentiment is positive as rabi sowing has picked up the pace and there is an expectation of good harvest. This is critical for Maruti as the rural segment accounts for 38 per cent of its volumes. The management also highlighted improved liquidity situation with lower loan rejection rates and higher finance penetration in the quarter.
The challenge for the company will be on the product mix front as it exits the diesel segment from February. With an all-petrol vehicle portfolio boosted by petrol versions of Brezza and S-Cross, the company believes it can maintain its market share, given the shift to petrol and the higher cost of diesel vehicles. The share of diesel vehicles has declined from more than half seven years ago to the current 29 per cent. While the trend is towards non-diesel vehicles, aggressive pricing by competition and a higher share of diesel vehicles in the mid and premium SUV market may be a risk for the company.
While Maruti has held its own in a slowing demand environment, unless there is a sharp improvement in demand, sales and margins may not see any major improvement. Given a 25 per cent gain from the start of August and lack of near-term triggers, expect the stock to be under pressure.