Auto: Desperate Times
Sales of passenger vehicles are slipping every month pushing the automobile sector into a downturn. By when will the trend reverse?
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If one puts together all the voices emanating from the Indian automobile industry over the past three months, they make for an unending tale of woes. “The industry has recorded de-growth for the tenth consecutive month. Weak consumer sentiments are reflected in this demand de-growth and we have also been impacted,” rued Mayank Pareek, President, Passenger Vehicles Business Unit, Tata Motors last month. Girish Wagh, President, Commercial Vehicles Business Unit, Tata Motors talked of the same effect, although he ascribed a definitive reason for the plight: “The industry is yet to recover from the revised axle load norms while the postponement of demand due to general elections has also dragged down CV sales,” he said.
Rajan Wadhera, President, Automotive Sector, Mahindra & Mahindra echoed Wagh when he said, “The ongoing elections had subdued the purchase sentiment during April.” R.C. Bhargava, Chairman, Maruti Suzuki India (MSI) didn’t see the pain going away anytime soon. He said, “The market would continue to be weak this year on account various factors including uncertainty over fuel prices and coming up of BS VI emission norms from next year.” For Sugato Sen, Deputy Director General, SIAM the slump was unprecedented. “In the last 10 years, we have not seen anything like this when all the segments are down. The start of the new financial year has not turned out to be very good,” he told media outlets. Rajesh Goel, SVP and Diector (Marketing & Sales), Honda Cars India says nobody could predict such a severe slowdown of the industry after a robust Q1 growth of 20 per cent in FY19. “Not only the slowdown has been severe but also prolonged. The price line at which customers are willing to pay for cars has gone down, which is evident from the promotions for new car sales offered by manufacturers throughout last year,” he adds. Vinkesh Gulati, Vice President, Federation of Automobile Dealers Associations (FADA) sounded equally gloomy: “The auto demand remained weak and there isn’t likely to be any uptick for the next 2-3 months.”
The voices from the two-wheeler industry were equally downbeat. “Higher insurance premiums and liquidity crunch continues to impact demand....Increased insurance premium in September 2018 dampened the festival sentiments and pre-festival stock build-up was converted into high inventories,” said Y.S. Guleria, Senior VP, Sales & Marketing, Honda Motorcycle and Scooter India (HMSI) in May. Devashish Handa, VP (Marketing, Sales & Aftersales) for Suzuki Motorcycle India acknowledged the “depressed industry sentiment” while Motofumi Shitara, Group Chairman, Yamaha Motor India sought to link the slump to the “uncertainty ahead of the general elections” and “increase in insurance costs”.
Experts say that in the past couple of years, over 200 dealers have wound up operations and shut around 300 outlets as their business turned unviable. There is an estimated job loss of 3,000 people related with dealerships.
In fact, for the month of May, the cumulative sales of the top six manufacturers including Hero MotoCorp, Honda Motorcycle and Scooter India, and Bajaj Auto, declined 8 per cent to 1.8 million units compared to the year-ago period. Amid slowing sales and unsold stock pile-up, two-wheeler makers have been curtailing despatches to their dealers. Automakers count despatches to dealers as sales.
A closer look at the auto sales numbers for May shows that the overall volumes were, in fact, dragged down by a sharp drop in sales of Hero and HMSI, the two largest firms by sales. While sales at Hero decreased 7 per cent (to 652,000 units) compared to same period a year ago, as rural sales remained weak, HMSI saw a steep year-on-year (y-o-y) decline of 16 per cent in its monthly despatches. The decline was largely due to the fall in scooter volumes. The company did not offer a break-up of scooter and motorcycle sales. Sales at Royal Enfield saw volumes drop 16 per cent (to 62,371 units) over the last year’s numbers.
Bucking the trend were only two companies — Bajaj Auto and Suzuki Motorcycle India. Bajaj Auto witnessed a 7 per cent growth in its despatches to just over 2 lakh units compared to the numbers reported in May 2018, while Suzuki Motorcycle India saw a 17 per cent growth in sales to around 62,500 units, a much lower base compared to Bajaj’s numbers though.
Coming to the passenger vehicle (PV) segment, in May Hyundai India’s domestic sales fell 5.6 per cent while for Mahindra it declined by 1 per cent — these two are the only domestic carmakers to have clocked a single digit decline in sales. While Maruti’s sales plunged 22 per cent and those of Tata 26 per cent, Honda, Nissan India and Toyota witnessed a fall 27 per cent, 47 per cent and 12 per cent, respectively. Struggling to Grow
As mentioned, sales of country’s largest carmaker Maruti Suzuki India have been falling too. For the fourth consecutive month starting February, MSI’s sales have fallen. The May 2019 numbers came as no surprise; the company sold 1,34,641 units in May compared to 1,72,512 units in May 2018, registering a dip of 22 per cent. Of the 1,34,641 units sold in May, domestic sales accounted for 1,25,552 units, while exports numbered 9,089 units. MSI witnessed a sales decline of 17.2 per cent in April 2019, 1.6 per cent in March and 0.8 per cent in February while witnessing a mere 0.2 per cent increase in January 2019.
Speaking to BW Businessworld R.C. Bhargava, Chairman, Maruti Suzuki India said: “In Q1 (Jan to March) and then in April and May 2018 MSI had very high dispatches as inventory at end of March 2018 were very low. Thus the high base was partly responsible for the steep fall in May 2019. Retail sales in May 2019 were in fact higher than in April 2019, though they were below last year. The market situation is judged better by retail sales and not dispatches, which reflect wholesale figures.”
Hyundai India, the country’s second-largest passenger carmaker too witnessed a decline in domestic sales in May. The fall was 5.6 per cent. In pure number terms, Hyundai Motors India sold 42,502 cars in May 2019 verses 45,008 units it had sold in May 2018. But if you take export figures into consideration, then Hyundai India’s cumulative sales for May 2019 stood at 59,102 units compared to 56,016 units in May 2018, an overall jump of 5.5 per cent. Hyundai India is the largest passenger car exporter amongst all carmakers in India.
Puneet Anand, Senior General Manager (Marketing) & Group Head, Hyundai Motor India acknowledges the industry slowdown even though Hyundai has bucked the trend in several months. Says Anand: “Since August 2018 till April 2019 the industry has really been witnessing a downturn. It was only in October 2018 that there was a marginal increase in the industry on a y-o-y basis.”
In FY19, domestic automobile sales volume recorded a modest growth of 5 per cent compared to 14 per cent in FY18 because of a variety of reasons including weak customer sentiment, high ownership costs, higher interest rates and fluctuating fuel prices, among others.
On a month-on-month comparison, the domestic automobile industry’s sales volume declined 14 per cent y-o-y in March 2019. Passenger vehicle sales declined 3 per cent y-o-y in March 2019 while the commercial vehicles segment did not witness any growth in sales volume on a y-o-y basis. During the month, the sales volume of medium and heavy commercial vehicles (MHCV) declined 5 per cent y-o-y on account of increased interest costs, tight liquidity conditions, especially amongst non-banking finance companies, revised axle load norms, delayed purchases owing to weak customer sentiments, and rising fuel prices.
However, sales of light commercial vehicles (LCV) continued to register a modest growth of 4 per cent y-o-y due to steady demand from the rural market. In March 2019, two-wheeler sales also declined 17 per cent y-o-y. The growth was constrained by increased insurance costs, rising fuel prices and higher interest rates.
What The Experts Say
Vishnu Mathur, Director General at Society of Indian Automobile Manufacturers (SIAM) cites a number of reasons for the motown slowdown. “The fuel cost reached the highest point post-August 2018. There was also a finance crunch (crisis at NBFC) starting with the whole IL&FS process, which reduced the credit availability to the dealers. It also had some impact on retail sales. In some states, two-wheelers registrations particularly were impacted because of their decision to sell two-wheelers to only those who owned a (driving) license,” says Mathur.
India Ratings and Research (Ind-Ra) has maintained a stable outlook on the auto sector for FY20 on the expectation of moderate sales volume growth in the passenger segment, high single to low double-digit growth in the commercial vehicle segment and steady growth in the two-wheeler segment on a year-on-year basis. Experts also point to a slew of regulatory changes — BS–VI norms, CAFE norms, higher axle load norms, vehicle scrappage policy, alternate mobility, etc.— also contributing to the uncertainty in demand. When was the last time that such a subdued market conditions prevailed in the domestic auto industry? “Passenger vehicle and two-wheeler categories are relatively stable segments and have not seen such significant decline at least in the past five years,” says Richa Bulani, Senior Analyst—Corporate, India Ratings & Research (Fitch Group). “Although the commercial vehicle segment is prone to cyclicality and had seen a decline in FY14 and FY15,” she adds.
Subrata Ray, Senior Group Vice President of ICRA says Kerala floods as well as a sharp increase in fuel prices dented car sales during Q2 and Q3 of FY2019. “Due to election related uncertainty as well as the high base of Q1 FY2019, the volume growth was muted in Q1 FY2020. However, there could be some recovery from Q2FY2020 onwards. Moreover, there could be some pre-buying witnessed in Q3 and Q4 of FY2020 ahead of the BS VI rollout, which will support volume growth,” says Ray.
The Road Ahead
Bhargava of Maruti is hopeful of a turnaround after July. “Past data shows that post-elections there is a spurt in the demand for cars. This year there is the fact of higher fuel prices and the increase in cost of cars due to regulatory changes. Despite that I expect a pick-up in demand from sometime in Q2 onwards,” he says. Agrees Anand of Hyundai, “I am very confident that we will also see an uptick in the industry going forward now that the government has already taken charge.”
“With the full Budget in July and the new regime in the finance ministry, I am sure some of the challenges will go away. The industry will start bouncing back within the next 7-8 months,” adds Anand.
Rajan Wadhera, President, Automotive Sector, M&M also echoes the sentiment. “Now, with a stable government at the Centre and the forecast of a near-normal monsoon, we hope to see an improvement in consumer sentiment over the next few months,” says Wadhera.Overall, ICRA expects a volume growth of 6-8 per cent in FY2020, with monsoon precipitation and rising cost pressures being key monitorables. On its part, Bulani of India Ratings & Research believes that the demand is likely to remain tepid in 1HFY20. “But we expect advancement in demand in the later part of 2HFY20 due to preponement of vehicle purchase by consumers in view of a likely rise in prices from April 2020. Nevertheless, government stimulus and improvement in credit availability will be key factors to watch,” says Bulani.
Goel of Honda Cars says he is still hopeful of revival in demand. “This will happen due to pent up demand, favourable indicators on monsoon, recent rate cut by RBI and further expected actions by the new government,” he adds.
For the industry, the smooth run-out of BS IV vehicles and switch over to BS VI vehicles before the stipulated deadline will be a key task during this financial year which will force the companies to plan their inventory meticulously.
Let’s keep our fingers crossed till then.
(Additional Reporting by Siddharth Shankar)