Interest Rates And Elections Will Temper Recovery

BMI View : We see the malaise, which the the Indian auto industry has been experiencing since the beginning of 2013, spilling over into 2014, due to the lingering uncertainty over the upcoming federal elections and elevated interest rates, which should ensure that the recovery in FY2014/15 will remain modest. A dominant theme for 2014 could be the comeback of petrol variants as diesel pump prices creep up and erode the fuel's cost advantage over petrol.

According to the Society of Indian Automobile Manufacturers (SIAM), Indian passenger vehicle sales (sum total of passenger car, utility vehicle and van sales) for November 2013 came in at 201,520 units, a decline of 10.2% y-o-y. While SIAM has not yet released its December sales figures, initial industry estimates suggest a y-o-y decline of at least 5%, which would bring sales growth for the first nine months of FY2013/14 (April-March) to about -6% y-o-y.

The bearish trend in commercial vehicle (CV) sales is similar with sales for the first eight months of FY2013/14 contracting by an eye-watering 17.5% y-o-y. We said in October 2013 that a real recovery in the Indian auto sector remained some time away and our bearish view on the sector continues to play out ( see 'Debt Laden Infrastructure Firms Affect CV Sales', October 10 2012).

Recovery Still Elusive
India - Domestic Passenger Vehicle Sales, Units (LHS); % Chg y-o-y (RHS)

BMI View : We see the malaise, which the the Indian auto industry has been experiencing since the beginning of 2013, spilling over into 2014, due to the lingering uncertainty over the upcoming federal elections and elevated interest rates, which should ensure that the recovery in FY2014/15 will remain modest. A dominant theme for 2014 could be the comeback of petrol variants as diesel pump prices creep up and erode the fuel's cost advantage over petrol.

According to the Society of Indian Automobile Manufacturers (SIAM), Indian passenger vehicle sales (sum total of passenger car, utility vehicle and van sales) for November 2013 came in at 201,520 units, a decline of 10.2% y-o-y. While SIAM has not yet released its December sales figures, initial industry estimates suggest a y-o-y decline of at least 5%, which would bring sales growth for the first nine months of FY2013/14 (April-March) to about -6% y-o-y.

Recovery Still Elusive
India - Domestic Passenger Vehicle Sales, Units (LHS); % Chg y-o-y (RHS)

The bearish trend in commercial vehicle (CV) sales is similar with sales for the first eight months of FY2013/14 contracting by an eye-watering 17.5% y-o-y. We said in October 2013 that a real recovery in the Indian auto sector remained some time away and our bearish view on the sector continues to play out ( see 'Debt Laden Infrastructure Firms Affect CV Sales', October 10 2012).

Looking at recent trends, our full FY2013/14 sales growth forecasts may be a tad optimistic and we are therefore downgrading them slightly. We now forecast auto sales for the full fiscal year to contract 6.7%, to 3.2mn units, from a 4.6% contraction previously.

Modest Recovery In FY2014/15

FY2013/14 will definitely be a year to forget for the Indian auto industry and carmakers will be looking ahead to FY2014/15 in the hope of seeing some positive growth. While we expect a modest recovery in sales, we are not projecting a sharp rebound due to the following reasons.

  • Elevated Interest Rates To Remain A Headwind

Interest rates remain high due to the stubborn inflation in the economy and our Country Risk team believes that interest rate cuts will only materialise in the second half of 2014 at the earliest ( see 'An Uncomfortable Pause From The RBI', December 18 2012). This will mean that higher borrowing costs will continue to weigh on vehicle sales for both businesses and consumers for at least the first few months of FY2014/15. It is only when the Reserve Bank of India gets the room it needs to begin easing in the latter half of 2014, that we could see a pick up in sales.

  • Elections Uncertainty Will Further Depress Sentiment

Another headwind for the sector in the early part of FY2014/15 will be the high degree of uncertainty over the outcome of the upcoming general elections in Q214, with no party currently standing out as being able to form a majority. While this has already been one of the reasons businesses are adopting a wait and see approach in the past few quarters (which has slowed investment activity), consumer sentiment will also remain downbeat in the run-up to the elections as buyers decide to defer their purchases.

With these threats on the horizon, we have decided to downgrade our FY2014/15 passenger vehicle and CV sales growth forecast to 3.0% and 4.5% respectively, from 6.0% previously.

The table below is illustrative of the woes faced by local carmakers. Despite record discounts, most firms saw sustained y-o-y declines in total sales (including exports) in December with only Maruti Suzuki and Hyundai India managing to see some growth as they increased their focus on the rural segment and rolled out new petrol variants of their models.

INDIA - DECEMBER SALES OF SELECT CARMAKERS (UNITS)
Carmaker December 2012 December 2013 % Chg y-o-y
Maruti Suzuki 82,073 86,613 5.53
Hyundai India 26,697 28,345 6.17
Mahindra & Mahindra 22,761 16,436 -27.79
Ford India 6,517 5,871 -9.91
Toyota 12,071 10,648 -11.79
General Motors 7,067 5,705 -19.27
Sales include exports. Source: BMI

Petrol Models Could Make A Comeback

A dominant theme for 2014 could be the comeback of petrol car models. Diesel vehicles, which have been popular in the past few years, have seen their share of new sales decline from 58% in the first eight months of FY2012/13 to 54% in the first eight months of FY2013/14. As diesel become more expensive (with pump prices rising every month as the government seeks to reduce subsidies), its cost advantage over petrol is eroded resulting in petrol models becoming more attractive (due to their cheaper sticker price). This could then result in automakers such as Tata Motors, which are dominant in the diesel segment, underperforming in FY2014/15.

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Sector: Autos
Geography: India
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