DIS­TRESS CALL

Af­ter en­dur­ing its worst fes­tive sea­son in half a decade, the do­mes­tic pas­sen­ger ve­hi­cle in­dus­try is brac­ing for a bleak win­ter.

Business Today - - THE HUB CORPORATE - By SU­MANT BANERJI PHO­TO­GRAPH BY HK RAJASHEKAR

IN A YEAR OF TWO HALVES, the do­mes­tic au­to­mo­bile in­dus­try that found it­self in a deep rut in se­cond half of 2018, stares at the pos­si­bil­ity of the neg­a­tiv­ity spilling over in the new year.

Sale of pas­sen­ger ve­hi­cles are es­ti­mated to have de­clined by nearly 2 per cent in the se­cond half of 2018, un­der­min­ing the high 13.3 per cent growth that was reg­is­tered in first six months. Sales de­clined for three con­sec­u­tive months in July, Au­gust and Septem­ber, sta­bil­is­ing briefly in Oc­to­ber only to de­cline again in No­vem­ber. All-time high dis­counts and in­cen­tives to liq­ui­date stocks in the last month of the year have helped prop num­bers in De­cem­ber, but the growth is still a muted un­der 2.5 per cent over pre­vi­ous year.

The slow­down has im­pacted pro­jec­tions for the fi­nan­cial year (AprMar) as well. Against an ex­pec­ta­tion of dou­ble-digit growth at the start of the year, the hope is now of at least a re­vival in the last three months of this fis­cal.

“We reg­is­tered dou­ble-digit growth in the first half of the year, but the third quar­ter has been tough. We are tar­get­ing flat sales in this quar­ter,” says R.C. Bhar­gava, Chair­man, Maruti Suzuki In­dia. “In the last quar­ter (Jan-Mar), there will be some growth… 5- 6 per cent that will put the full year fig­ure at 8 per cent. We will strive for a dou­bledigit growth, but it will be tough.”

The ini­tial omi­nous signs came in the first week of Au­gust when heavy rains hit Ker­ala in 2018, ahead of one of the state’s biggest fes­ti­val, Onam. Fol­lowed by Ganesh Chaturthi in the west, and Navra­tri and Di­wali in the north, Onam in many ways marks the be­gin­ning of a nearly three months of good sales for au­to­mo­bile com­pa­nies. A bad Onam was a bad omen.

“Ker­ala is a very ro­bust mar­ket. It con­trib­utes 10 per cent of in­dus­try sales and is a de­pend­able mar­ket; ev­ery­body looks at Ker­ala to off­set any short­fall in other mar­kets,” says Ra­jesh Goel, Se­nior Vice Pres­i­dent and Di­rec­tor, Honda Cars In­dia.

Af­ter reg­is­ter­ing a blis­ter­ing near 20 per cent growth in sales in the first quar­ter of this fis­cal, it was al­most as if some­body hit the brakes with full force for the do­mes­tic pas­sen­ger ve­hi­cle in­dus­try. In the se­cond quar­ter, sales de­clined 3.6 per cent as the in­dus­try went into a tail­spin with red ink for three con­sec­u­tive months for the first time since 2013/14. In the third quar­ter, sales are es­ti­mated to have de­clined by an­other 1.96 per cent.

“The three months of Au­gust, Septem­ber and Oc­to­ber were bad. In Oc­to­ber, there was a slight re­cov­ery com­pared to the other two months, but even then it was lower by at least 10 per cent com­pared to 2017,” says Goel.

While the calamity in Ker­ala was un­fore­seen, other more fun­da­men­tal fac­tors were also ad­verse. Crude oil prices started ris­ing from March 2018 and went up by over 45 per cent year on year in the April- Oc­to­ber 2018 pe­riod as com­pared to the same pe­riod in 2017. Dur­ing this pe­riod, re­tail prices of petrol went up by over 11 per cent. In­ter­est rates also went up by 25 ba­sis points in the first half of last fis­cal. Fur­ther, in­sur­ance reg­u­la­tions also un­der­went changes. Pay­ment of three-year pre­mium in the first year of pur­chase for third-party li­a­bil­ity was made manda­tory and per­sonal ac­ci­dent cover (PAC) was in­creased from ` 2 lakh to ` 15 lakh, which led to an in­crease of ` 6,000 in pre­mium (`4,500 if PAC is of one year) for even an en­trylevel car like Maruti Alto.

All these fac­tors to­gether slowed the au­to­mo­bile in­dus­try’s growth story. The ca­su­alty was the fes­tive sea­son when sales usu­ally reach their peak.

In­dus­try body, So­ci­ety of In­dian Au­to­mo­bile Man­u­fac­tur­ers – which col­lates whole­sale data for the auto in­dus­try, said com­pa­nies shipped 5.6 per cent less cars and 8.3 per cent less SUVs to their deal­er­ships in Septem­ber 2018. This was the steep­est de­cline in a month since June 2017, when dis­patches were ar­ti­fi­cially low due to the roll-out of a uni­fied GST in July. The lower ship­ment was a clear in­di­ca­tion that con­sumers were not in­clined to-

wards buy­ing cars. “It is ob­vi­ous there is a mis­match in de­mand and sup­ply so the in­ven­tory is high in deal­er­ships,” says Rajan Wad­hera, Pres­i­dent, Au­to­mo­tive Sec­tor, M& M, in mid- Oc­to­ber.

“In the run-up to fes­tive sea­son, man­u­fac­tur­ers stock up at deal­er­ships and if the sales are not com­men­su­rate to ex­pec­ta­tions, there is a prob­lem of in­ven­tory which would need to be cleared at some point of time.”

Much against hopes of the in­dus­try, the script would not change dur­ing Navra­tri or Di­wali as sales slumped to a five-year low. Ac­cord­ing to the Fed­er­a­tion of Au­to­mo­bile Deal­ers As­so­ci­a­tion (FADA), re­tail sale of pas­sen­ger ve­hi­cles dur­ing the 42-day pe­riod of fes­tive sea­son be­tween Oc­to­ber 10 and No­vem­ber 20 last year de­clined 14 per cent com­pared to the fes­tive sea­son of 2017.

“We have not seen such a dull fes­tive sea­son, in the past few years,” says FADA Pres­i­dent, Ashish Har­sharaj Kale. “It is a mat­ter of deep con­cern for our deal­er­ship com­mu­nity.”

“The fes­tive sea­son was below ex­pec­ta­tions. We were ex­pect­ing that sen­ti­ment to re­vive by Di­wali but fac­tors like in­ter­est rates, firm fuel prices and ad­di­tional cost of ` 9,000 on in­sur­ance pre­mium were a drag,” says R. S. Kalsi, Ex­ec­u­tive Di­rec­tor, Mar­ket­ing and Sales, Maruti Suzuki In­dia. “The se­cond half of the year has some con­cerns and growth may not pick up as the sen­ti­ment con­tin­ues to be low.”

The slug­gish off­take of cars and SUVs has jeop­ar­dised plans for the rest of the year with in­ven­tory lev­els con­tin­u­ing to be high at the deal­er­ships. Be­fore the fes­tive sea­son, in­ven­tory level for the in­dus­try at large stood at around 50 days. This has barely come down to 45-days by the end of No­vem­ber and re­mains higher than nor­mal. As a re­sult, most car­mak­ers like Maruti, Toy­ota and Ford re­ported a de­cline in ship­ments to deal­er­ships in No­vem­ber. Even Hyundai Mo­tor In­dia, which launched the new Santro in end Oc­to­ber, and Tata Mo­tors that had for all this while in the fis­cal been an out­lier, could not man­age to grow their num­bers dur­ing the month.

“Con­sumer de­mand has wit­nessed a down­ward trend over the fes­tive pe­riod. We are try­ing to main­tain lean in­ven­tory at deal­er­ship to avoid stock pile-up,” says N. Raja, Deputy Man­ag­ing Di­rec­tor, Toy­ota Kir­loskar Mo­tor.

What does the fu­ture hold for the in­dus­try? In the im­me­di­ate short term, com­pa­nies would be forced to dole out heavy dis­counts to clear the in­ven­tory. Typ­i­cally, buy­ers stay away from pur­chas­ing in De­cem­ber as the year draws to a close fear­ing low re­sale value. In just a month or less, a car bought in De­cem­ber de­pre­ci­ates faster on book value due to the model year change. Car­ry­ing in­ven­tory to the next year for any dealer in par­tic­u­lar, is al­ways a headache.

There may be some respite for the in­dus­try as macroe­co­nomic in­di­ca­tors for the econ­omy seem to be im­prov­ing. Af­ter reach­ing a high of $86 per bar­rel in Oc­to­ber, Brent crude prices have slumped to un­der $60 per bar­rel. As a re­sult, re­tail prices of petrol have gone down by ` 15 per litre from the highs of early Oc­to­ber. Ru­pee has also ap­pre­ci­ated against dol­lar, while the threat of any in­ter­est rate hike by the RBI looks un­likely for now.

“Eco­nomic in­di­ca­tors seem to be look­ing up from the last week of Oc­to­ber, but the im­pact is still not vis­i­ble on the ground. I am hop­ing it will be­come vis­i­ble over the next few weeks,” says Goel of Honda.

An in­dus­try that braved dis­rup­tions like de­mon­eti­sa­tion and GST bet­ter than oth­ers, the pas­sen­ger ve­hi­cle mak­ers in the coun­try now ap­pear to be stuck on re­verse gear.

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