Stock loyalists of Maruti Suzuki India, India’s top selling carmaker, received a rude jolt on Friday when the management announced its third quarter earnings, with margins plummeting to a five-year low. The results are a classic case of weakness in demand triggering an array of discounts to push inventory, eventually eroding profitability.

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The company’s revenue growth slowed to 2 percent at Rs 19,668 crore due to sluggish demand. There was significant operational pressure as margins fell 600 basis points year-on-year to 9.8 percent after material costs rose 370 basis points quarter on quarter and employee costs increased 110 basis points quarter-on-quarter.

One basis point is a hundredth of a percentage point.

Discounts have also surged to record highs of Rs 24,300 a unit, hitting margins significantly this quarter. All this led to a 17 percent drop in profits to Rs 1,489 crore. The damage to demand for Maruti, majority-owned by Japan's Suzuki Motor Corp, is real.

In the third quarter, Maruti’s volumes fell 0.6 percent from a year ago and 11 percent a quarter ago to 4.28 lakh units. Note that this is the second consecutive quarter that volumes have decreased.

Exports have been a pain point for Maruti, with volumes tumbling 24.5 percent from a year ago. Maruti has actually lost 120 bps market share to rival Hyundai Motor India after the latter launched the new Santro. Maruti still enjoys market leadership at 51.1 percent in the passenger vehicle segment, but the few chinks in the armour are showing.

The management did not exude much confidence at the conference call either. They indicated that growth is still subdued in the market. Little wonder the stock closed at a fresh 52-week low on Friday.