Maruti Suzuki, which sells every second car in the Indian market, said it planned to review its strategy on discounts after the most profitable domestic automobile firm reported a double-digit dip in profits. The Suzuki-owned company saw its profit slip 17 per cent to Rs 1,489 crore for the third quarter (Q3) ended December 31, 2018.
The carmaker offered record discounts during the quarter to push sales in an otherwise sluggish period, which, combined with other factors, led to a sharp decline in margin. “The policy of discounting requires a relook. It is not a good way to sell cars by giving high discounts.
Once you start offering high discounts, customers’ behaviour changes and they expect discounts round the year. We need to bring discounts down,” said R C Bhargava, chairman at Maruti Suzuki.
Maruti Suzuki Chairman R C Bhargava
The company offered a record average discount of Rs 24,300 per vehicle in order to clear the unsold inventory after a lacklustre festive season. This discount was high, compared to Rs 18,800 in the second quarter and the average of Rs 19,400 for the April-December period of 2018-19.
The Q3 discount is higher by 36 per cent, compared to the corresponding period of 2017-18. The high discounts helped dealers bring down vehicle inventory to a reasonable level, but toned down the margins.
The double-digit decline in profit pulled down the company’s stock by over 7 per cent on Friday and eroded its market cap by Rs 15,740 crore in a single day. The stock price of the country’s most valuable automobile firm hit a 21-month low of Rs 6,420 at the BSE on the same day. Analysts tracking the company raised margin concerns after the results were announced.
“Operating deleverage due to subdued volumes, increase in commodity prices, higher discounting, adverse forex movement led to a steep drop in the margins. Given weak operating performance, net profit dropped 17 per cent and missed estimates by a huge margin.
Maruti’s volumes and margins are likely to remain under pressure in the near term as consumer sentiment continues to remain weak,” said Bharat Gianani, automobile research analyst at Sharekhan by BNP Paribas. Maruti Suzuki reported a single-digit margin of 9.8 per cent in Q3 after several consecutive quarters of double-digit margin. The margin is down 600 basis points (bps), compared to last year’s corresponding margin of 15.8 per cent as well as sharply lower than analysts’ forecast for the last quarter.
Jefferies, an equity research firm, said Maruti’s ‘big miss in margins is due to high discounts and unexpected slowdown’. It estimates the higher discount over Q2 alone affected margin by 110 bps. The weak outlook has prompted analysts to lower the target price for the company’s share. Jefferies, for instance, has reduced its target price by over 7 per cent to Rs 7,600.
“Despite near-term cyclical headwinds, we maintain a buy on Maruti...,” Jefferies noted. Bhargava said discounts cannot be brought to an end immediately, but they must come down from the levels seen in recent quarters. “Discounts should not determine our sales,” he added. The rising discount in FY19 has more than negated the positive impact of the price hikes done by the company.