Lockdown impact: Weak volumes to aggravate margin pressures for Maruti

Shift towards entry-level segment a positive given its contribution to revenues

Maruti Suzuki’s March quarter (Q4FY20) show was dented by muted volumes and higher discounts. While the automaker reported average volumes of 150,000 units in January and February, the lockdown and subsequent production cut led to a 44 per cent dip in March volumes, compared to the average. 

Higher selling prices on account of the BS-VI transition, insurance costs, and road tax in some states hit volumes, especially in the entry-level segment. The mini and compact segments — which account for 73 per cent of volumes — fell 11 per cent YoY in the quarter, and 16 per cent in FY20.

 A difficult credit environment, larger down payment, uncertainties related to BS-VI transition, and the rural slowdown were factors adding to woes.

Even as volumes declined, the firm had to spend more to clear inventory and improve sales. Discounts offered in the quarter were 26 per cent higher than the year-ago period, which, coupled with the lack of higher priced diesel-powered units, led to lower realisations. Revenues were, thus, 17.1 per cent lower than the year-ago period.

 

 

Given the fixed costs, lower capacity utilisation led to a 32 per cent fall in operating profit, while margins that came in at 8.5 per cent were 200 bps lower than Q4FY19. Despite cost pressures, the company could not pass on higher expenses to consumers due to the weak market condition. 

Though the company has not shared any outlook on volumes, the initial trend indicates there is a clear shift towards the entry-level segment, given the uncertain economic environment. 

Maruti could be a beneficiary of such a trend, given that nearly 75 per cent of its volumes comes from these  segments. The other trend that could help is the transition to petrol, with diesel-powered vehicles losing out on account of higher costs and falling fuel differential. The share of diesel-powered vehicles halved YoY to 

20 per cent in FY20.

While Maruti’s presence in the rural segment — accounting for 38 per cent of sales — is a positive, given the good rabi crop and normal monsoon, discretionary spends are the first casualty in a slowdown and the market leader could face the brunt of the same.