Is there more downside for the auto sector?

With a mere 5% rise in sales in FY19, India’s auto industry is facing a challenging period

Published 5 years ago on May 23, 2019 1 minute Read

Taher Badshah, CIO (Equities), Invesco Mutual Fund

The auto sector could face challenges in coming months. A process of inventory correction is currently underway, which is partially responsible for low sales in the primary side. On the retail side too, sales are weak. Wholesale segment has reported weaker numbers because festive season sales didn’t materialise, oil prices were very volatile and NBFC liquidity crunch slowed down retail sales. Earlier, NBFCs were at the forefront of lending for the auto sector. Now, they are slowing down, but it isn’t clear whether banks are willing to fill that gap by lending aggressively. Going forward, cars and commercial vehicles will face tighter regulations on emission, safety and insurance, which will push up prices. Absolute sales could be negative for next few months. Currently the industry is going through a cycle of weak sentiment because of the ongoing elections. The sales, especially primary, will remain subdued until inventory correction is completed and elections results come out. The sector has yet to completely heal.

Jigar Shah, CEO, Kim Eng Securities

The inventory at the dealership level is high, but recovery will begin from Q2FY20. The credit crunch will go away in a few months and interest rate cuts are expected as inflation remains benign. This will also help to fuel credit. In a few years, India will be among top three countries, up from fifth position, in terms of vehicle ownership in passenger vehicle category. A healthy growth rate is also expected in the commercial vehicle (CV) segment. As the consumption sector grows, demand for light commercial vehicles will pick up. After scrappage policy and BS-VI norms are implemented – with the Goods and Services Tax in place — CVs will grow at double digit. The two-wheeler segment will also expand at 5-7% with premium segment showing healthy growth. In the two-wheeler segment, penetration is high but the ownership period is coming down, so we think there will greater churn with people upgrading their preferences. The valuations are attractive. The stocks have fallen and the sales volumes will build in some time.