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Auto sales at 16-yr low: Only a return to cash can ring in a quick turnaround

New Delhi: Two-wheeler dispatches fell by a fifth or over 22 percent in December, the first full month after demonetisation, as dealers and buyers struggled with sparse cash. In fact, December dispatches - which means sales from factory to dealers - for all automobile categories combined fell 18.66 percent, the steepest decline in 16 years. Almost half of the sales of two-wheelers (scooters and bikes) come from the rural market, which has been the hardest hit due to demonetisation. Then, a majority of the two wheeler purchases are not financed, unlike passenger cars, thereby also increasing the cash component in the entire value chain.

Representational image

Representational image

In fact, the decline in two wheeler dispatches was the biggest contributor to the overall fall in combined industry dispatch numbers. Dealers are struggling with stale inventory across most product categories but for motorcycles and scooters, this has reached alarming proportions. This is evident from production figures issues by the Society of Indian Automobile Manufacturers (SIAM) - production of scooters fell by over 30% last month whereas that for bikes was down almost 25 percent or by a fourth.

In fact, analysts from brokerage Emkay said the volume decline in two-wheelers could be up to 34% in December. They pointed out that market leader Hero MotoCorp reported a volume decline of 34 percent compared to December 2015 while TVS sales dispatches were down 8 percent (with scooters also seeing a drop of 15 percent, motorcycles of 18 percent and mopeds volumes grew +14 percent). Bajaj Auto's volumes were down 18 percent.

While two-wheleer sales will likely take many more months to show a reversal in this massive decline, passengers cars and Utility Vehicles may have already been directed towards the recovery path. Industry lobby group SIAM struck an optimistic note while releasing December production and dispatch numbers, saying the impact of demonetization was temporary. “Demonetisation has had its impact on the industry although we feel it is a temporary phase,” said Director General Vishnu Mathur.

The total decline in dispatches in the passenger vehicles segment (Includes cars, UVs and Vans) was just 1.36 percent during December - but the decline in UV dispatches was a steep 30 percent while passenger car dispatches were down about 8 percent.

A look at passenger cars and the market leader in this segment - Maruti Suzuki India - shows why Mathur could be partly right. Maruti sells every second car in the domestic market and it is evident that any negative impact of demonetization on car bookings for Maruti has already reversed. Maruti accounts for every second car sold in India, and if the slowdown in bookings seen in November has already corrected for it, there is reason to believe other car makers will also slowly get back their mojo.

Chairman R C Bhargava said late last month that bookings were down by a fifth or 20 percent in November on the demonetization announcement (year on year) but picked up in December. Till December 22nd, bookings were up 7 percent compared to the same month last year. Unlike some other car makers, Maruti has not curtailed production at all post demonetization as almost all its models continue to be waitlisted.

The only two cars which continue to feel the shock waves of demonetization are the Maruti Omni vans and Eeco – which are used both in goods and passenger transport sectors. Bhargava further said that if Maruti can see a turnaround, there was no reason for other car makers to not see a similar increase in bookings over the next few months.

Demonetisation has impacted sales of cars and UVs in two ways. According to analysts Pramod Kumar and Sumeet Jain at Goldman Sachs, “Maruti Suzuki is best placed within our passenger vehicle coverage as it enjoys almost 130,000 unit order backlog, has relatively lower system inventory and has the highest number of launches coming up in the next 12 months.”

The two analysts further said in a note to clients that in India, cars and utility vehicles are “exposed to the rural cash based economic system (we estimate about 25 percent of volumes) which would be impacted by a liquidity squeeze in the short term.” Also, customers who potentially benefited from the informal economy would now be scaling down their purchase ticket size or deferring purchase decisions in the short to medium term, impacting categories such as higher priced cars/SUVs.

“However, we expect the demand cut to be relatively low with most passenger cars/UVs sold through the formal channel, over 75% of sales financed by banks/ NBFCs/vehicle financing firms according to our estimate, and cash purchases carried out within the imposed limits on cash transactions. We see lower inventory, strong order backlog and urban market presence as positives in this scenario. Over the long term, we see more upside from this move as tax net would widen bringing down effective tax rates and increasing disposable income with consumers. We stick with our medium/long term structural themes — SUVs and Automatics,” the two analysts have said.

It is clear that those vehicle categories where a large number of units are not financed and those where a majority of sales happen in the rural areas are impacted the most through demonetisation. If India gets back to a cash economy - already many small businesses and MSMEs have begun accepting and making payments in cash - then these segments will see a quick rebound. But if the current digital push continues, then the recovery in these segments could be many months away.

Also, buyers may be waiting to assess the impact of GST which is expected to be operational in the new fiscal; they may also be waiting for any promised rate cuts from banks as well as any announcements in the upcoming Budget which could make their vehicle purchase cheaper.


Updated Date: Jan 11, 2017 12:58 PM

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