Auto Sector Slowing As A Result Of Costlier Fuel And Funding

Over the years, the automobile industry in India has been outperforming the market by a respectable margin. The BSE Auto Index has seen YTD returns of 13.96 per cent against 9.38 per cent of the BSE Sensex. Despite this outperformance, volume figures, stock movements in the last three months and the recent production cuts by companies display a completely different side.

Lately, the sector has been sluggish over macro-economic issues. Soaring fuel costs and higher interest rates have been directly affecting the way passenger vehicles have been performing. With a depreciating rupee, currently at a tad below 56, has been forcing fuel prices upwards even though the global crude prices are on the decrease. The cost of interest too has risen significantly over the past year. The inaction of the RBI towards lowering rates on Monday saw further disappointment in the market. Approximately 70 per cent of the retail segment depends on external financing for their purchase, thus majorly hampering demand.

The demand for petrol passenger vehicles has trenched to the extent that companies are holding production to avoid a stock pile-up. Among these, Toyota Kirloskar Motors has halted production of all its petrol cars. Fiat as well is considering stopping production for a few days next month. Maruti Suzuki too has also planned its annual week-long maintenance to be scheduled for next week. According to SIAM, Fiat India Automobile Limited’s car production fell by 57.13 per cent last month.

The demand for diesel cars is on the rise, it being approximately 40 per cent cheaper than petrol. This has resulted in them accounting for 40 per cent of the new car purchases in March 2012. In April 2012, the sector witnessed growth of 59 per cent as compared to last year. This drastically growing demand for diesel cars forced companies to add capacities to bring down lengthy waiting periods which could go as high as four months for certain models. These are already reducing as reported by Tata Motors and Toyota Kirloskar Motors. This rosy side of the sector too has the potential to be damaged if the proposal for an excise duty hike on diesel cars gets implemented.

Slowing demand is also seen in the commercial vehicles segment. This can be attributed to higher interest costs and to a slowdown in industries such as construction and mining. As per SIAM, the commercial production of Tata Motors has declined by 15.89 per cent in May 2012. In FY11-12, the domestic sales in the automobile industry displayed a volume growth of 12.01 per cent compared to the previous year. This figure shows us the gravity of deterioration in domestic demand since the industry grew at a more than double i.e. 26.17 per cent in FY10-11. SIAM has estimated the industry to rise by 10-12 per cent in FY12-13. Though the industry continues to show a double-digit performance figure in terms of volume, it has lost its earlier charm. This can be further emphasized on by taking a closer look at the major players in the sector.

Maruti Suzuki recently has decided to sign an agreement with the Gujarat state government to set up its manufacturing facility. At the same time, it has also planned its week-long maintenance to be scheduled for next week.  This shows the striking contrast in the current situation of the sector and the potential it is looking forward to. As compared to the previous year, the volumes for Maruti Suzuki have declined by 10.80 per cent for FY11-12. This figure has been negative even for the month of May 2012 when compared to the corresponding month previous year and stands at -5 per cent. In April and May 2012, all the categories and sub-categories of Maruti Suzuki showed negative growth except for its compact and super compact passenger vehicles. At the same time, the diesel segment saw growth of 80 per cent in April 2012. Putting together all these factors, the overall outlook has been negative and the stock price has seen a drop of approximately 20 per cent in the last three months.

In the month of March, Tata Motors banked the highest ever sales for both commercial and passenger vehicles and also had monthly sales crossing the 1,00,000 mark for the first time. After that month though, volumes declined in April by 6.67 per cent compared to the previous year. May too saw a low profile growth of 3.61 per cent. Figures have been strong for Jaguar and Land Rover which grew by 35 per cent YoY for May. Despite the outstanding performance of JLR, the overall slump has hampered the outlook towards Tata Motors.

Mahindra & Mahindra (M&M) has been performing far better than the industry. Its volumes grew at 22.82 per cent compared to the previous year. The firm has seen major success with the launch of XUV500. They plan to increase monthly production to 5,000 units by September-October. While other companies struggled with volume growths in April and May 2012 compared to the corresponding months in the previous year, M&M struck 26.89 per cent and 28.16 per cent respectively.

The two-wheeler sales in FY11-12 grew by 14.16 per cent wherein the motorcycle and scooter volumes were seen at 12.01 per cent and 24.55 per cent respectively. Looking at these figures where scooters are evidently growing faster than motorcycles, it is fair to ask if Bajaj Auto may be losing out by keeping out of the scooter segment. Moreover, relative to the previous year, monthly sales in the three-wheeler segment have been diminishing. In April 2012, the segment declined by 12.89 per cent and in May 2012 by 34.88 per cent.

The three-wheeler segment declined even in the case of TVS Motors. In FY11-12 the company saw a volume growth of just 7.41 per cent. Their growth figures have not been promising in the last couple of months as well. Even the monthly sales for May 2012 declined by 5.33 per cent compared to the previous year. This below-than-average growth has resulted in a decline in the stock prices by 22.6 per cent over a period of three months.

Hero Motocorp marked its 10^th consecutive month of over 5 lakh sales last month. The sales in May touched 5,56,644, breaking the April record and also growing at 11.30 per cent compared to May 2011. Meanwhile, interest rate reductions and lower fuel prices combined with festive demand in the second half of the year can help speed the industry back to its pace. Till then, the industry will go through sloppy demand and slow growth figures.

Domestic Sales Of Automobiles (SIAM)