The markets’ fears about an erosion in Maruti Suzuki Ltd’s pricing power are turning out to be true. The company announced a price hike of roughly 1% in some of its models on Monday to compensate for an increase in input costs as well the shift to Bharat Stage IV norms. (In some models, such as the Ritz and the A-Star, the price increase is much lower.)
The actual increase in manufacturing costs on these two counts is estimated to be larger by analysts. But the company has been constrained by a price increase of 2% taken just about a month ago after excise duties were raised.
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More importantly, there has been a considerable increase in competition in the small car space. Recent launches include Ford India Pvt. Ltd’s Figo and Volkswagen AG’s Polo, and each of these products have been launched at attractive prices. This is partly because these manufacturers have managed to reach significant levels of localization for their parts.
According to a research report by IIFL Capital, the recent launches in the small car segment led to significant discounts being offered in March, which has traditionally been a strong month for car sales. Maruti, too, offered a significant benefit worth Rs27,000 on every purchase of the Ritz.
The pressure on pricing doesn’t bode well for margins, especially since raw material costs have risen sharply.
Steel manufacturers are raising prices owing to a substantial rise in their costs. But with newly launched models vying for market share, Maruti will find it difficult to pass on these cost increases to customers.
As a result, margins are likely to drop this fiscal year.
This has been factored in to some extent by the markets. Since October last year, Maruti’s shares have fallen by 15% even while the BSE Auto index has risen in excess of 18%. In fact, the BSE Auto index touched a new all-time high on Monday, even as Maruti’s shares have been languishing. This reflects the growing competitive environment in the small car space.
Graphic by Ahmed Raza Khan/Mint
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