BMI View : With May passenger vehicles sales down 8.9% y-o-y, we are downgrading our full FY2013/14 passenger vehicle sales growth forecast to 2%, from 4% previously, to 2.7mn units. Due to India's stubborn twin deficits, we do not see consumer sentiment improving materially anytime soon. The recent depreciation in the Indian rupee will further add to the woes of the auto industry, resulting in job cuts by both automakers and suppliers, if the current dire situation continues.
The Society of Indian Automobile Manufacturers (SIAM) reported May passenger vehicle sales (sum total of passenger car, UV and van sales) of 201,437 units, down 8.9% year-on-year (y-o-y). While the poor start to the year was expected, due to BMI's expectation of a recovery in the auto market only in H2FY2013/14 (April - March), the strength of the y-o-y contraction has forced us to downgrade our full FY2013/14 passenger vehicle sales growth forecast to 2%, from 4% previously, to 2.7mn units. This will then revise our total vehicle sales forecast to 3.1%, from 4.7% previously, to 3.6mn units.
The passenger car market is now into its seventh consecutive month of contraction and continues to exert the largest drag on passenger vehicle sales. The accompanying chart shows SUV sales growth still in positive territory, which plays out BMI's view on the SUV segment remaining a bright spot going forward, and outperforming the rest of the auto sector.
|Passenger Car Sales Remain The Deadweight|
|India - Breakdown Of y-o-y Growth Within Passenger Vehicle Segment, %|
Poor Economy Informs Our Downgrade
Although we expect H2FY2013/14 to show an improvement in car sales due to the launch of new models, sales will need to post strong y-o-y growth rates to make up for the poor start to the fiscal year, if there is to be strong full-year growth in the passenger vehicle market. Furthermore, while loan rates have moderated due to previous Reserve Bank of India (RBI) easing measures, they are still high, causing consumers to hold back on new purchases.
While we have seen a small bounce in economic activity lately, our Country Risk Team believes that it is unlikely to lead to a full blown economic recovery due to the country's stubborn twin deficits. With elections coming next year, the upside risks posed by populist-related expenditures on the government's already-high fiscal deficit remain acute and stubborn oil prices are largely responsible for the current account deficit. Furthermore, there remains a strong demand for imported gold, which adds on to the country's external shortfall. Therefore, we do not see consumer sentiment improving materially anytime soon and this will keep a lid on new car purchases in the near term.
Idling Capacity Highlights Severity Of Situation
The fall in car demand has caused some automakers and component manufacturers to idle their factories. Maruti Suzuki, the nation's largest car manufacturer, halted production for one day on June 7 at its Manesar and Gurgaon plants due to falling demand for its diesel cars and rising inventory levels at the firm. We see such developments as indicative of the broad slowdown suffered by the auto market due to India's current economic woes.
Recent Rupee Depreciation Adds Further Pressure
We see the recent depreciation of the Indian rupee as another headwind for carmakers. The rupee has depreciated about 9% against the US dollar since the start of May, and is currently trading at roughly INR58.9/US$. Automakers which use imported parts will be in a quandary. If they raise prices, to offset their fall in margins, they will lose market share in an already competitive domestic market. In May, 9 out of India's 14 automakers, suffered a y-o-y decline in their sales. The weakening currency will push some carmakers, which are currently sourcing parts from abroad, to pursue a localisation strategy ( see 'FX Concerns Support Localisation View', 31 May 2012).
Besides grappling with anaemic demand, component suppliers will now be facing higher raw material costs as well due to the depreciation of the local currency. While OEMs which source locally usually compensate them at the prevailing exchange rate, the long payables cycle with some of their overseas suppliers will result in certain forex risk nonetheless. Small suppliers, which are unable to effectively hedge the volatility in exchange rates, as well as ride out the current downturn, will be forced out of business.
Should the dire situation persist, we see both suppliers and carmakers having to cut jobs, which will further hurt consumer sentiment and negatively affect car sales.