Chart Beat | Will Maruti's price war on small cars turn the tide? It's cutting deeper than the GST drop.

The most significant price cuts are on entry-level models like the Alto, S-Presso, and Celerio, with more modest reductions for larger vehicles such as the Brezza, Grand Vitara, and Invicto.

“Based on our calculation, while weighted-average price reduction due to GST should have been about 6.5%, the company has taken an average price reduction of about 7.5% due to much higher price cuts in the entry segment cars," analysts from Nomura Financial Advisory and Securities (India) said in a report dated 18 September. Note that the actual price decrease for consumers would depend on how the discounts on Maruti’s cars are calibrated.

This strategy is a direct response to the declining demand in the entry-level car segment. This segment has been losing market share due to weak income growth, rising costs, and a growing consumer preference for SUVs. As a result, Maruti's overall market share has been shrinking over the past five years (see chart), with the entry segment being the most affected.

Attention will now shift to the effectiveness of these steep price cuts, as the company waits to see if they encourage car purchases among the lower-income population and, in turn, boost its market share.

Nomura's analysts highlight the dual-edged nature of this strategy. While the initiative could initially impact the company's average selling prices (ASPs) and near-term profit margins (potentially by as much as 100 basis points), it also holds the promise of long-term gains. If the consumer response is positive, the increase in sales volume could improve Maruti's market share and operating leverage.

The market's immediate reaction to the price cuts has been favourable. Maruti's shares hit a new 52-week high of ₹16,060 apiece on Friday.