Maruti Suzuki India Ltd, India’s largest passenger vehicles maker reported its December ending earnings last Friday. The results disappointed investors as the company’s net profit declined by more than 17% on a year-over-year basis. This decline was even worse than a 10% decline in profits that the company suffered in the September ending quarter last year. This shows that all is not well with the company. Maruti’s stock experienced a free fall of 8% after the company’s announcement of results last week.
Maruti’s operating margins came at 9.8% in the last quarter, which was the lowest in the previous five years. Some of the factors that lead to a decline in profits were higher commodity prices, unfavourable currency rates and abnormally high level of discounts offering to attract customers. Rising fuel prices in the last quarter also didn’t help the cause. Besides, Maruti’s exports in the previous quarter declined by 8.5% due to lower demand and stronger US dollar against most of the currencies. Growing competition from Honda, Mahindra and Tata Motors is also impacting the company.
Not everything is lost for Maruti, however, the company still dominates the car segment and has more than a 50% share in this market. Maruti is now also looking to address the issues that impacted it in the last quarter. The company is looking to get rid of the discounts that it had to offer in the previous quarter. It provided an average discount of Rs 24,300 per model, which was 75% higher than the average of Rs 13,900 discount is offered in the year-ago quarter. The company has now realized that discounts are not an ideal way of selling cars as it changes customer behaviour and they expect even higher discounts in the coming days.
To counter competition, Maruti has recently launched a few more car variants. It launched new Ertiga in October last year; a new model of WagonR a few days back and more recently it launched new Baleno. In addition to these, Maruti’s new Swift, Swift Dzire and Ciaz models are also doing well.
Despite some of the positives, I still expect Maruti to experience headwinds in the short-term mainly due to the slowdown in the overall auto sector in India. Higher insurance costs, stiff interest rates, and a liquidity crunch are some of the factors that are weighing on this sector. However, the long-term fundamentals for Maruti look good.
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