A Summer Of Subdued Auto Sales?

Avishek Banerjee Apr 05, 2019

Vehicle sales during the 2018 festive season were noticeably lesser than industry expectations and with the General Elections round the corner, it looks like the volumes are going on a downward spiral. The slowdown in the auto industry in FY19 reflects the current cyclical downtrend in growth led by tighter financing conditions and weaker agriculture realisations. To top it all, buyers are delaying purchases on account of the upcoming elections. “The election period shifts the country’s focus to the ‘Dance of Democracy’ and the average customer is typically wary of making big ticket purchases until the results are announced,” says Avik Chattopadhyay, founder of brand consultancy firm Expereal. “It is widely believed that the lull should persist till May 2019, waiting for clarity post the election results,” he adds.

Consumer sentiments are subdued due to increasing cost of ownership of passenger vehicles (PV), those tracking the auto industry point out. “High interest rates on car loans, increase in insurance costs, fluctuating fuel prices, etc., are a few of the reasons for the slow growth in demand. Implementation of GST has also increased the working capital requirement for the dealerships,” says SIAM’s Director General Vishnu Mathur. According to Mathur, the downward trend in sales began with the Kerala floods in August 2018 and has continued since then with no change expected in the short run. “The upcoming election has also led to the level of uncertainty in the market, prompting consumers to delay their discretionary purchases, including cars,” says Mathur.

Auto industry body SIAM reports that domestic PV sales comprising cars, utility vehicles and vans grew by 3.3 per cent y-o-y for the period April 2018 to February 2019 versus 8 per cent y-o-y growth recorded in the financial year 2018-19. In the first quarter of the current fiscal, the PV industry overall recorded a notable growth of 20 per cent. However, since then, the growth in sales have been muted or even negative and thus has led to overall dip in the PV sales growth.

In fact, passenger vehicles segment witnessed fourth consecutive month of decline in sales in February, when the sales were down by 1.11 per cent at 272,284 units compared to 275,346 units in February 2018.

Issues plaguing the sales figures of PV doesn’t stop there. The auto industry has to soon comply with emission norms to implement BS VI standards. “The next one year will be a testing time for the industry as it leapfrogs from BS IV emission norms to implement BS VI emission norms across the country in a span of three years for which the developed countries had taken 7-8 years,” points out Mathur.

Complying with the new emission norms could also mean that some vehicle models may have to be discontinued by the companies or new variants complying the emission norms need to be launched in the market for the newer models.

Several auto manufacturing companies are now looking to find ways to stay ahead. “As far as the passenger vehicle industry is concerned, Maruti Suzuki will grow by 6 per cent whereas the rest of the industry excluding Maruti may have no growth at all,” says R.C. Bhargava, Chairman, Maruti Suzuki. It is interesting to note here that although Maruti had targeted a double digit growth, the company later revised it downwards, according to Bhargava.The reason behind revising the target is a reflection of the industry performance, he adds.

“Both in 2008-2009 and 2013-14 (election years), the PV industry also had very little growth.Substantial slowing down in those two years. After the elections in 2009-10 and 2014-15, there was a sharp increase in the growth of the industry. Whether that will happen this year or not, nothing can be said. I don’t know why it happens but that has been the pattern. There is a lull that happens every time the government tenure ends,” says Bhargava.

Ravi Bhatia, President and Director, JATO Dynamics India, is of the view that the market will remain flat for the fiscal 2019-20 or may post plus-or-minus 2.5 per cent growth. “A lot depends on how the election results impact the segment and economic growth. The strength of government mandate would be key. This year is even more challenging from regulatory perspective as BS VI norms kick in on 1 April 2020,” says Bhatia. “Further the industry is starting to feel the disruptive impact on new mobility paradigm where new millennials are rethinking their approach. The share of trips in rented cars is going up,” adds Bhatia.

Ashish Modani, VP and co-Head, Corporate Ratings, ICRA, explains that customer sentiments plays a crucial role in purchase of discretionary items cars, resulting in deferral of purchase unless sentiments improve. “Increase in fuel prices and hike in interest rates in current fiscal increased cost of car ownership, which impacted sentiments of price sensitive first-time buyers (FTBs),” says Modani. Consumer sentiments remain cautious ahead of upcoming general election, which will continue to weigh on discretionary purchases like cars, he adds.

“Given election related uncertainty as well as high base of Q1 FY2019, the volume growth is likely to remain muted in Q1 FY2020. However, in case of stable government formation at the Centre, there could be possible recovery from Q2 FY2020 onwards. Moreover, there could be some pre-buying witnessed in Q3 and Q4 of FY2020 ahead of BS VI rollout, which will support volume growth,” says Prithviraj Srinivas, Chief Economist, Axis Capital.

ICRA notes that over the next two years, the PV OEMs are estimated to incur a combined capex of ~Rs 350-400 billion on capacity addition, product development and localisation initiatives to comply with the BS VI and safety related norms.

Modinomics: Boon Or A Bane?
The automobile sector under the Modi government has grown moderately, especially the domestic sales due to growth in economy. The rising disposable income due to the cut down in the prices of basic goods and services has helped people make the decision to buy the four-wheeler of their choice. Numbers tell the story -- the overall domestic automobiles sales increased by 7.01 per cent CAGR between FY13-18 with 24.97 million vehicles being sold in FY18. Financial inclusion, which has helped deepen credit penetration, has been a boon to auto sales. Apart from this, GST implementation and increasing tonnage capacity of roads has also changed preferences of consumers. Although the current government under PM Modi has announced the implementation FAME II incentives for electric vehicles, the overall sentiment of uncertainty for the short term has taken precedence.

Many industry observers are of the opinion that too many policy changes in a short span of time is taking the toll on auto industry. “We have been seeing that global OEMs typically look out for stable policy environment so that they can do localisation at a bigger scale and extract advantage of their Indian operations globally. However, on certain aspects like emission norms it is great for the public as we will have access to better quality air to breathe if vehicles are modern and vehicles comes with stricter emission rules on road,” says Puneet Gupta, Associate Director (vehicle sales projection) at IHS Markit.

“The basic principles have been progressive when it comes to focusing on manufacturing, skilling and green echnology but the policies have been half-baked, inconsistent and disconnected. Basically put together by people operating by remote control with little understanding of the complexities and exigencies of the industry,” says Chattopadhyay. He further points out that the auto industry looks up to whichever government is in power to be supportive, encouraging and facilitating growth and progress.

“The Modi government is no exception. Just that some huge statements were made, which have either been retraced from or not implemented in letter and spirit,” says Chattopadhyay.

“Modi government has been proactive in terms of bringing Indian global industry at par with the global standards and they stand committed. In Modi government, prices of cars have been going up pre dominantly because they are equipped with better emission and safety standards.,” explains Gupta.

“UPA2’s policies clearly led to greater auto sales, but that was post-global financial crisis stimulus and hence not comparable (with the current government). The fallout of inadequate pullout of stimulus was clearly seen through higher inflation and eventual slowdown in structural growth in the latter half of UPA2. The Modi govt’s policies haven’t targeted the auto sector directly per se, but the auto industry has indirectly benefited from it and would continue to benefit from them in the coming years. Think rural credit penetration, mobile penetration (aspiration) and direct benefit transfer,” Srinivas added.

What Lies Ahead
Kanika Goyal, Analyst, India Ratings and Research ( Fitch Group) says, “We expect PV demand to remain subdued in FY19 amid weak consumer sentiments, lack of financing availability and no new model launches. However, PV sales volume is likely to increase on a y-o-y basis in FY20, on account of improved consumer sentiments, and BS VI implementation, which will increase the cost of vehicles from 1 April 2020, thus preponing the purchases.”

The company expects PV to record a mid-single digit growth in FY20. The sector is witnessing several regulatory changes including BS VI, CAFE norms, higher axle load norms, vehicle scrappage policy as well as alternate mobility. “The ongoing regulatory changes in the industry and lack of clarity on the policy front, brings uncertainty in the demand pattern in FY20,” adds Goyal.

It is true that the current scenario in the automobile market needs to get better. However, many believe that the current mood may not change till end of May. “The average customer wants stability of purpose, clarity in policy and strength in decision making. The earlier we experience the same, the better for all the stakeholders in the automobile market,” says Chattopadhyay.