A bumpy ride for automakers: Festive season hasn't seen strong pick-up

Festive season hasn't seen strong pick-up, margin pressures continue

The auto industry is an excellent indicator of economic health. When auto sales are strong, consumption demand is strong. The supply chain absorbs primary metals and rubber, and also sophisticated composites and electronics. The industry also generates services activity. Hire purchase is the largest component of retail financing, and the industry contributes volumes to maintenance and repair as well as marketing and advertising.

India’s auto-industry has been in the doldrums for years. It wasn’t doing well prior to Covid. It has taken a beating in the last six quarters. Apart from slow demand, there have been supply-chain disruptions, especially because of chip shortages.

The current sales trends indicate a K-shaped recovery. Sales of four-wheelers have started to pick up. So have sales of commercial vehicles. But two-wheeler sales are down. So are sales of entry-level four-wheelers.

Generally, the festive season sees the launch of new models and discount offers and the period of two months contributes 40 per cent of annual sales. But there hasn’t been a strong pick up this year. Year-on-year (YoY), sales in the first seven months (April-October) have grown 10.5 per cent for two-wheelers. Passenger car sales have grown 32 per cent. Commercial vehicle sales have grown 4 per cent. Tractor sales are up 9 per cent, but tractor demand trends are seasonal and the true picture is not yet apparent. Three-wheeler sales are up 54 per cent. Most categories are lower than in FY19.

Even the October sales of two-wheelers were lower for all major players (Bajaj, Hero, TVS, and Eicher) and passenger vehicles (due to Maruti production crunch) than last year. However, there was a sequential improvement in October over September in every category.

Every automaker has complained of margin compression due to rising costs and an inability to pass on cost increases due to soft demand. In Q2FY22, Maruti saw 4 per cent YoY increase in cost of raw materials and 44 per cent increase in cost of purchased goods and 16 per cent in employee-related expenses.

Bajaj Auto saw YoY increases of 24 per cent in raw materials, 41 per cent increase in cost of purchased goods and 9 per cent increase in employee expenses. 

On the positive side, interest rates and EMIs are low, which could drive demand. Also, the guidance is that chip shortages are easing, which allows for ramping-up production. Demand is expected to pick up in the second half, but it will be fragmented. The CV segment could outperform, while TVS and Eicher are more likely to outperform in the two-wheeler segment.

The Nifty Auto index has somewhat underperformed the Nifty in the last year, gaining 47 per cent versus the market’s gain of 53 per cent. But the Auto index surged 8.3 per cent in the last month, when the market gained only 1 per cent. The momentum depends on November sales numbers.

The big contributors to the rally include Tata Motors (up 42 per cent in a month), TVS Motor (up 24 per cent), Ashok Leyland (11.5 per cent) and Maruti (8.6 per cent). Among ancillaries, Tube Investments (up 27 per cent), Bosch (14.7 per cent) and Bharat Forge (5.4 per cent) are the big gainers. Bajaj, Hero and Eicher have been sold down, losing ground, along with Amara Raja.