Maruti slips on weak rural demand, fewer new models

Updated: August 12, 2019 7:03:20 AM

Maruti’s smaller cars —which account for 30% of its total volumes — didn’t do well in the April-June quarter, clocking 1.2 lakh units compared with 2 lakh in April-June, 2018.

Maruti Suzuki, retail sales, market share, rural demand, wholesale volumes, consumption slowdown, rural IndiaMaruti’s total volumes for the current year could be about 5% lower than in 2018-19. (Reuters)

By Pritish Raj

With its retail sales falling 17% year-on-year in the April-June quarter, Maruti Suzuki has lost some 150 basis points of market share, leaving it a shade under 51%. The wholesale volumes for July — less than one lakh units — suggest a further slide in its share to levels of below 49%; in July 2018, the company commanded a share of 52.4%.

Unless the consumption slowdown reverses, Maruti’s total volumes for the current year could be about 5% lower than in 2018-19. Analysts also believe the company’s strategy to move out of the diesel space for smaller cars is not prudent.

While the weak demand in rural India, where Maruti sells 39% of its volumes, has hurt sales, it’s also true, say analysts that India’s biggest carmaker hasn’t come up with new models that could have enticed the customer. The last new launch from its stable was the upgraded Hatchback Wagon R in January. In contrast, Hyundai’s Santro, which was relaunched in October, is doing well as is the XUV300 from Mahindra & Mahindra. Both firms priced their products competitively; the Santro, for instance, is available at a starting price of Rs 3.7 lakh while the Celerio is a little more expensive at Rs 4.15 lakh. The XUV 300, which competes with the Creta and Ford Ecosport, is selling in good numbers probably because it is a newer model and is Rs 1.5 lakh cheaper than Creta.

Maruti’s smaller cars —which account for 30% of its total volumes — didn’t do well in the April-June quarter, clocking 1.2 lakh units compared with 2 lakh in April-June, 2018. With used cars available at half the price of a new one — a five-year-old Swift can be bought for less than Rs 3 lakh compared with Rs 6 lakh for a new one — they are selling well.

Estimates by CarDekho show sales of used cars in FY19 were at 40 lakh, higher than the sales of new cars which was at 33 lakh units. Weak consumer demand is, of course, a big reason for Maruti’s sluggish sales. The popular Brezza — a compact SUV — saw a big contraction of about 50% y-o-y in volumes in July, possibly losing out to Hyundai’s Venue. The compact hatchback, the Baleno — again very popular — also saw a de-growth in volumes.

The big worry is that Maruti could give up more share once it withdraws diesel models from its portfolio in April 2020. Diesel cars constitute around 23% of total sales and more than half its range has a diesel engine option. Smaller engines will shift entirely to petrol, CNG & hybrid, given the sharp increase in cost of diesel after BS-VI & RDE. The management expects even fleet sales to shift to CNG or petrol-hybrid over time, based on economics.

“We note that its decision to completely vacate diesel for smaller vehicles is a risk particularly to its market share in Brezza and fleet sales,” analysts at Jefferies noted.

Maruti has already transitioned variants of many of its best-selling models — Alto, Baleno, WagonR, Swift and Dzire — to BS-VI with the majority of models expected to shift by the end of CY19. The company has clarified it is still evaluating the BS-VI variant of its 1.5-litre diesel engine, though this is unlikely to be ready by April 2020.

The management is less worried and is hoping to see its volumes bounce back in 2020-21. In the company’s annual report for 2018-19, Maruti Suzuki chairman RC Bhargava said: “My belief is that we are near the bottom of the downward cycle and the economy and car sales should start to accelerate in the near future.” Nonetheless, analysts have trimmed their earnings estimates for FY20-22 by 10-18%, mainly driven by 6-9% cut in volumes estimates. “Volume growth for the PV industry is likely to remain challenging in FY20 owing to the slowdown in the urban and rural areas and the impact of significant increase in car prices due to regulatory changes,” analysts at Kotak Institutional equities wrote. They pointed out the Maruti management is extremely cautious and is unable to predict the decline in PV industry in FY20.The stock has been a big underperformer, losing Rs 1.22 lakh crore in value over the past year with the price tanking 42%.

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