The government’s move to replace high denomination currency notes effectively withdrew 86 percent of the currency in circulation. This has hurt near term demand as consumers are forced to minimise discretionary spend. The rural market, which has a higher propensity of cash transaction, is facing a stronger cutback in consumer spends, which impacts segments like two-wheelers and tractors.
The SIAM data on wholesale despatches for November indicates a moderation in growth across various segments – the growth in passenger vehicle segment has moderated to 1.8 percent; medium & heavy commercial vehicles segment has reported a 13.1 percent declines and two-wheeler have recorded a 5.5 percent declines. The same is expected to exacerbate further in December as OEMs (original equipment manufacturers) undertake inventory corrections in the distribution channels. The situation should however start improving starting 2017 as cash availability in the system improves.
While favorable monsoon in the current year was expected to be a trigger for increased discretionary spend from the rural markets, demonetisation has put a brake on the same. The cash flows for the farming community depend on kharif crop sales that commenced in October/November.
The cash crunch would have impacted realisations for crop sales. Due to the lack of cash, farmers may have resorted to low-yielding seeds saved from their earlier produce for Rabi sowing as against purchasing higher quality seeds, which is turn could impact the productivity to certain extent. Overall, unavailability of adequate cash during the sowing time for Rabi season could have a bearing on farm incomes in the next season.
Passenger vehicle: Short-term negative, expected to normalise over the medium-term
While the passenger vehicle industry has low dependence on cash, with nearly 75 percent of the purchases being financed, anecdotal evidences indicate a sharp decline in buying interest in the initial weeks of the demonetisation. Also, the second hand market, which is dominated by the unorganised segment (over 70 percent share), largely deals in cash and has seen sharper slowdown.
After robust Q2FY17, domestic passenger vehicle segment growth slowed down during November in the backdrop of demonetisation impact. We expect December volumes to remain subdued, though some recovery could be expected from January onwards once liquidity condition improves. Exports however remain unaffected and continue to grow at double digit.
Overall, while Icra expect deferment of purchase in the near term, over the medium term the impact is expected to be largely neutralised as market liquidity improves.
Two-wheeler: Near-term impact negative, largely due to liquidity constraints in the rural markets
The two wheeler segment has a relatively high proportion of cash purchases, with financed purchase being low at around 30-40 percent. As per ICRA’s estimates, rural markets account for about 60-65 percent of the entry segment motorcycle sales and given the high propensity for cash purchases in the rural markets, the entry segment of the motorcycles is expected to be a casualty. On the other hand, the above 500cc super-premium segment may witness some volume pressure given the relatively high prevalence of unaccounted cash in the purchases of this segment motorcycles.
Over a longer horizon, Icra believes that the two-wheeler demand is unlikely to be impacted given the strong demand side factors such as current low penetration levels, improving disposable incomes, shortening replacement cycles and inadequate public transport systems in several parts of the country.
Commercial vehicles: Demonetisation to impact pre-buying expected ahead of BS-IV implementation
Despite high financing penetration in the CV space, the impact of tight liquidity is likely to hit the road logistics sector in the near-term and would prompt the transport community to put their vehicle replacement or addition plans on the back burner (i.e. domestic CV sales contracted by 11.6 percent in November).
Our channel checks with various stake holders in the logistic sector suggest that liquidity crunch has impacted the near term demand for trucks. Availability of trucks, especially from market-load operators has also reduced significantly owing to limited availability of cash to meet trip expenses. According to CV dealers, new enquiries have dried up and even ongoing transactions have been put on hold by fleet operators.
Overall, with demonetisation, the demand for trucks is expected to come under pressure, which was otherwise expected to get a boost from pre-buying preceding the implementation of BS-IV emission norms from April 2017. Within the CV industry, we believe that the bus segment would however be the least impacted by the demonetisation move in the near-term owing to a higher proportion of sales to institutional clients (i.e. SRTUs, schools & colleges and travel operators).
(The author is senior group vice-president, corporate sector ratings, ICRA Ltd)
Updated Date: Dec 16, 2016 13:20:55 IST