Rising inventories with dealers and infrastructure cess-led price hike are forcing automobile companies to sell most of their cars, except newly-launched ones, for deep discounts.
Price cuts on older models are expected to increase further, as inventory levels with dealers have risen from an average of two-four weeks to five-six weeks.
All vehicles from the stable of market leader Maruti Suzuki, barring Baleno and the recently launched Vitara Brezza, are selling at a discount. In fact, for Maruti, the discount levels have increased every quarter during FY16. While discounts stood at 4.2% of the average selling price in Q1, they increased to 5.6% in Q3. The management expects it to increase further. During Q3, discounts rose to an all-time high of R22,000 per car from R19,500 per car in Q2.
“Maruti negatively surprised in Q3 with a sharp fall in Ebitda margins to 14.7% from 16.7% in Q2 FY16. The company attributed the 200 bps decline to 100 bps of factory inventory correction, 50bps from higher discounts, 50bps from higher maintenance of Gurgaon plant and some increase in people costs. While the management expects margins to normalise in the coming quarters (to the YTD average of 16%), we view this as a disappointing performance, particularly in light of the commodity price tailwind,” HSBC Global Research wrote in its review of the company’s Q3 earnings.
“Management expects discounts to remain at elevated levels in the near term. Further, unfavourable recent currency movement and increased marketing costs have translated to a cut in our FY17/18e margins by120bps,” HSBC wrote.
The increased level of discounts by Maruti is being offered on Alto, WagonR, Celerio, Dzire and Swift. These models are old and have not gone through a makeover in recent times. Mid-size sedan Dzire went through a design makeover some four years back. Premium hatchback Swift hasn’t seen an upgrade in terms of design and features for an even longer period. Understandably, to push their sales, the company keeps offering discounts. While cash discount of Rs 20,000-30,000 is being given on some models, loyalty discount to existing Maruti car owners, as well as benefits like free insurance and accessories, are also being offered.
It is the same story with other passenger vehicle manufacturers, but since their portfolio is smaller than Maruti, the range is smaller. Hyundai, the second-largest passenger vehicle manufacturer, is offering discounts on its i10 Grand model. It launched two new models last year, compact SUV Creta and a spruced-up version of premium hatchback i20. Since both the models are new and selling well, the company is not offering any discount on them.
