Maruti raises margins on some models from Jan

In a weak market, firm offers more liquidity to dealers

NEW DELHI: Maruti Suzuki India Ltd, the nation’s top carmaker, has boosted dealer margins for three of its highest-selling models, underscoring a weak domestic car market and increase in operational expenses at its dealerships saddled with rising inventory.

Margins have been increased by ₹3,000 per vehicle on Maruti’s Dzire (a compact sedan), Swift (a hatchback) and Vitara Brezza (a compact sport utility vehicle), said three people with direct knowledge of the development.

The step by Suzuki Motor Corp. unit took effect in January and is expected to offer additional liquidity to dealerships at a time when demand has dropped.

The dealers are also facing a credit squeeze after the crisis at Infrastructure Leasing and Financial Services Ltd triggered a liquidity crunch in India’s banking system.

With automobile sales slowing since September, dealerships are grappling with unsold stocks even as their operating expenses continued to swell. Maruti is the first among India’s top auto makers to lift dealer margins though the step can be a drag on the company’s profit margins. Maruti also increased the price of its products from January 1.

The first person cited above said the company is trying to help its dealers at a time of weak demand. “The dealers have been offering huge discounts and inventory has again piled up in February,” the person said, requesting anonymity.

The companies “thought that revival has started from December and January after a bit of a pick-up in retail sales but February sales have slumped again,” said the person.

A spokesperson for Maruti did not respond to emailed queries sent on Monday.

Retail car sales in India fell 8.25% from a year earlier in February to 215,276 units, the sharpest so far this fiscal year, according to the Federation of Automobile Dealers Association.

Maruti has also trimmed its sales growth forecast for this fiscal year to 8% from a more than 10% growth forecast at the start of the year.

In January, Maruti dispatched 18,795 Swift cars and 19,073 Dzire cars from its factories to dealerships. It also dispatched 13,172 Vitara Brezza SUVS, according to data compiled by the Society of Indian Automobile Manufacturers. Based on the January sales performance, the decision to increase dealer margins on the three models would cost Maruti about ₹15 crore per month.

Puneet Gupta, associate director at researcher IHS Markit, said it is possible for Maruti to offer higher dealer margins since it is financially stronger than its rivals although the step would impact the company’s profit in the short term. “As vehicle sales have fallen sharply, this is a way to incentivize dealer partners since they have to maintain high inventory. Automakers in adverse times help their respective dealers and component suppliers when the demand falls in the market,” said Gupta.

Maruti dealers are also facing rising cost of setting up new showrooms and service centres as well as running existing establishments especially in metro and tier one cities. The dealers have, therefore, been demanding an increase in their margins to enhance their profitability.

The second person cited above said overall operating cost has risen significantly in terms of employee salaries and rent paid for real estate. So, this is also another reason behind the increase in margin. “This step taken may not have a huge adverse impact on the financials of the company since the prices of the vehicles have also been increased over the last one year. Hence, there won’t be a significant impact,” explained the person. The person said the three vehicles comprise almost 35-40% of Maruti’s sales volume and the latest measure would help to stabilize financial health of the dealerships.

“Maruti’s dealers were not used to maintaining high level of inventory and the operational expenses have also increased due to the increased number of unsold stocks. Also, Maruti wants the dealers to pass some part of this on to the customers as offers,” said the person requesting anonymity.