INSUBCONTINENT EXCLUSIVE:
just-reviving demand cycle matures.
Instead of fatter profits at the earliest stage of the revival cycle, companies seem to be tilting
putting off the decision on margins until the demand trend shows further signs of firming.
In the last quarter, companies such as Voltas
Maruti Suzuki (the largest car maker) and Bajaj Auto (the third-largest motorcycle maker) have either resorted to price cuts or gave more
incentives to buyers.
Voltas launched several such schemes
This has enhanced the Voltas market share in multi -brand outlet (MBO) format by 150 basis points to 23.5 per cent in the June 2018 quarter
If such strategies continue, the company would gain market share for the sixth straight year since 2005.
Similarly, Bajaj Auto created a
flutter in the entry-level motorcycle segment after it reduced prices and jolted the equilibrium in the two-wheeler market
Its market share improved by 120 basis points in the 100-125cc segment so far in FY19
Bajaj Auto said that it will pursue market share in the domestic motorcycle segment through CT100 and Platina over the next two to three
It plans to reach a market share of 24 per cent in the domestic motorcycle segment in the next two to three years from 16 per
cent.
Similarly, Maruti Suzuki continues to offer incentives in the entry-level car segment despite a 26 per cent volume growth in the June
This volume growth was the highest in the past 22 quarters
The average discount per vehicle increased Rs 1,241 to Rs 15,141 in the June quarter.
Similarly, leading cement players lowered prices by
Moderation in prices helped UltraTech clock volume growth that was three times that of the industry in the June quarter.
The prime objective
behind such aggressive pricing is the belief that increasing capacity utilisation could have multiplier impact on earnings growth
Analysts cite that this belief stems from the fact that in early phase of improvement in demand cycle when it is difficult to gauge the
sustainability of demand, companies focus on pricing to gain market share
Only when demand looks sustainable, especially in the long-term, companies raise prices to improve their margins.
This is reflected in the
rising return on equity (RoE) of large-sized companies
The RoE of large-sized companies (BSE 100) grew to 29 per cent in 2008 from 21 per cent in 2004
At present, it stands at 12.8 per cent, which is at a 15-year low
Analysts point out that once operating leverage kicks in, it will expand RoE in the coming years.
These observations are aptly echoed in the
June earnings call of India Cements
Vice Chairman and Managing director N Srinivasan explained the logic behind lower pricing power despite robust volume growth
He told analysts that during the early stages in the improving demand cycle, most players are cautious about underlying demand and have less
visibility on its sustenance
Hence, consumer prices remain lower in the early stages of a demand revival cycle before they head north.
