The past two months haven’t been easy for automakers in India, especially the passenger vehicle segment. Sales volume has dropped for two months consecutively – 2.71% in July and 2.46% in August, as compared to the same period last year. Maruti Suzuki and Hyundai were among the worst hit, while Mahindra and Mahindra was able to buck the trend. In addition to domestic sales, exports, too, have shrunk by 7.37% year-on-year in Q1FY19. As the sales took a hit, the stock price of Maruti Suzuki and Tata Motors have corrected by 20% and 14% over the past two months.
Rising fuel prices and interest rates have played spoilsport. While analysts say overall demand has been weaker in comparison to expectation; the floods in Kerala at the onset of festive season in the state also hit demand. “Kerala alone accounts for 7.7% to 8% of industry volume,” says Arun Agrawal, assistant vice president, Kotak Securities.
The fall in sales comes after the segment reported a double digit year-on-year growth of 30% in June. Jinesh Gandhi, senior vice president, equity research, Motilal Oswal Securities says that the passenger vehicles segment has witnessed a reasonable domestic growth of about 7% in FY19 so far. In addition to a low base month of June (when people had delayed purchase in anticipation of GST roll out on July 1st 2017), new product launches contributed to bumper sales in the first half of the year, believes Aditya Bapat, senior research analyst, IIFL. “The launches happened around February, but its effect was seen in the following months with demand uptick,” adds Bapat.
Sluggish demand for the second month in a row has led to bearish market sentiment in OEMs like Maruti which enjoy a premium multiple. “That premium is justified but there is selling pressure and with the broader market correcting, Maruti Suzuki could see underperformance,” says Abhishek Jain, research analyst, HDFC Securities. Agrawal adds, “There will be impact on profitability due to weak INR, and hence the correction in stock price. You need to also need to be cognisant of the fact that competition that used to be benign in the case of Maruti has gotten aggressive. Marazzo of M&M competes with Ertiga.”
But the tide is expected to turn. Analysts believe that while weakness in demand will persist in September, sales will pick up in October and November on the back of the festive season. In addition, auto replacement demand will be coming in from Kerala. Jain says that October onwards they are expecting 10-12% growth. “This is typical growth in demand every festive season. Demand from rural market will also pick up substantially,” he says.
Jain believes that Tata Motors could also benefit as it launched products cheaper than its peers, thereby gaining market share. While Tata Motors is focused on entry-level cars, Maruti Suzuki has been betting big on its premium and utility range, points out Jain, adding that both segments are expected to do well. Bapat points out that while rising fuel prices might impact first time buyers, who may postpone buying, those going in for an upgrade will not necessarily wait for prices to normalise.
Full year growth for FY19 is expected to be about 9.8%. “Growth in the passenger vehicle segment year-on-year from FY15-FY18 has been 4%, 7%, 9% and 8%. We expect demand to pick up this year as well,” says Agrawal. With festive season around the corner, pickup in demand could herald better days for the passenger vehicle segment in India.