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Maruti Suzuki Chairman Sounds Warning on Sinking Demand for Sub-Rs 10 Lakh Cars

Maruti Suzuki, India’s largest carmaker, is now fighting a slowdown in the segment where it sells cars under Rs 10 lakh. The chairman of the company, R C Bhargava, said lower demand could sink the industry in the long term and affect its higher-priced variants.

Decline of Sub-Rs 10 Lakh Car Segment Causes Worry

The total car sales decline in the first half of this fiscal year is not a cause for worry, but the steep dip in demand for cars below Rs 10 lakh poses a problem, says R C Bhargava, speaking in a post-earnings call. Budget cars had occupied a huge chunk of the market. Bhargava said 80% of the cars sold in India during FY19 were priced less than Rs 10 lakh. The chairman said it is difficult to see this level of decline: if the sales of budget cars go down, fewer buyers would eventually move up to the premium models, and there will be a gap in market dynamics.

Maruti Suzuki: Causes for Budget Car Sales

According to Bhargava, the key aspect affecting this segment is its affordability. Budget cars took over India’s automobile segment for years, but present economic changes have priced this product out of reach to a major section of people’s budgets. Demand for budget cars has declined even without facing semiconductor shortages or any great disturbance in production. Bhargava said the broad industry slowdown may be in for the long haul if demand doesn’t revive, even though it has not eaten into the high profitability maintained by Maruti Suzuki so far.

Hope in Festive Season Sales

According to Bhargava, the festive season will recover some of the company’s lost sales. The company also expects retail sales to grow by about 14% during this period. This would help it control its inventory levels. By the end of October, it is projected that the firm will maintain 30 days of stock, much healthier than when the year started. It will also alleviate the pressure in offering deep discounts since lower inventory levels equate to less incentive to clear them.

Inventory and Wholesale Management

Wholesale sales at Maruti Suzuki declined 3.9 percent to 463,834 units in the July-September period. Bhargava said the company had rationalized dispatches from the factory to keep stock levels in check. Lower inventories mean that Maruti wouldn’t have to resort to huge discounts, which keeps profit margins better and ensures that retail momentum remains in place. Bhargava added that proper stock level management can reduce the incidence of discounts, which, otherwise, puts pressure on profitability.

Maruti Suzuki: Urban Market Slowed, Rural Demand Strong

By geography, the demand witnessed by the company remained in the rural markets much better than in the urban. According to Partho Banerjee, senior executive for marketing and sales at Maruti Suzuki, “Rural continues to be positive while the urban market is facing pressure due to the current economic factors that influence purchasing power of the buyer based in the urban pockets”.

Financial Performance And Provisions Short Of Its Forecasts

Maruti Suzuki registered a fall of 17.4% in net profit at Rs 3,102 crore in the last quarter when compared with the street’s expectations. The changes in tax regime, that affected the long-term debt mutual funds, forced Maruti to make an amount of Rs 837 crore in the said segment. The company reported net sales of Rs 35,589.1 crore for the quarter, which was marginally up from Rs 35,535.1 crore a year ago. Sales growth was modest and reflected industry challenges in general.

Maruti Suzuki: Passenger Vehicle Sales Growth Outlook

Despite these negatives, the fiscal outlook seems rather positive and expects passenger vehicle sales to grow at the rate of 3-4% during the quarter gone by as against the estimated expectations of SIAM. “We still expect this festival season with better rural demand to help offset budget decline and pave the way for well-balanced growth in all market segments.”.

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