Bumpy road ahead for carmakers as retail demand turns sluggish

The road ahead for carmakers could get slippery as retail demand grows sluggish, thanks to the combined effect of rising fuel prices, firming up of interest rates, and price increase by manufacturers. Despite a double-digit increase in wholesale (dispatches to dealerships) last month, companies are staying alert to the road ahead. With retail demand being on the downswing, some manufacturers are beginning to sound off on the demand challenges.

Korean carmaker Hyundai, the second-biggest player in the domestic car market, has raised prices by up to 2 per cent from June 1. The company admits to demand outlook being somewhat passive. “The price increase was minimal to ensure the impact on buyers was marginal. Challenges, however, have increased with the spike in fuel prices, rising interest rates, and inflation. Retail demand in May was low, further demand could be a test. There is a silver lining though with the forecast of a good monsoon; demand, too, should find support from future launches,” said Rakesh Srivastava, director (sales and marketing) at Hyundai Motor India.

Fuel prices are up by double digits since the start of this calendar year. In the Capital, petrol has moved up by almost 12 per cent since January to Rs 78.20 per litre. In Mumbai, its price skyrocketed by more than 10 per cent. The price of diesel is up nearly 16 per cent in Delhi and Mumbai. Prices had hit a record high last month. Fuel prices are a key component of vehicle operating costs. The year-on-year (YoY) increase is even steeper.  

Veejay Ram Nakra, chief of sales and marketing (automotive division) at Mahindra & Mahindra, said retail across industry was slow last month, especially passenger vehicles. “We believe this temporary phenomenon is largely confined to May. We expect a good monsoon will shore up demand,” said Nakra. Manufacturers in India report only wholesale numbers (sales made to dealerships). 

There is no organised data on retail sales. However, a Maruti Suzuki dealer in the Capital with multiple outlets said retail demand has been low by 8-10 per cent, compared to last year. Maruti Suzuki is expected to announce a price hike soon.

Industry officials and dealers said inventory is beginning to climb. Discounts and promotions have started inching up. Tata Motors said on Friday that May was a ‘challenging month’ and retail had hit the brakes. It did not elaborate on the reasons behind the slow-moving retail.

Anurag Mehrotra, president and managing director at Ford India said even as the outlook is positive at the macroeconomic level, industry needs to exercise caution, given the rising commodity and fuel prices that are expected to trigger inflation. 

 Industry sold 3.28 million units of passenger vehicles during 2017-18, with a YoY growth of almost 8 per cent. At the start of 2018-19, industry body Society of Indian Automobile Manufacturers had projected growth to be in high single digits in 2018-19. Leading banks such as State Bank of India, ICICI, and HDFC raised lending rates by up to 20 basis points (bps) on Friday, making home as well as car loans expensive. The twin impact of higher fuel prices and rising interest rates may lower growth pace for carmakers. 

 “More than the rate of car loans, if banks increase home loan rates by 10 bps or more, the higher equated monthly instalment on home loan reduces disposable incomes. Monsoon is the only calming factor that will keep rural demand active during the second half of the year,” N Raja, deputy managing director at Toyota Kirloskar Motor, said in a recent interaction. Raja added that the annual salary increases in the information technology industry this year was lower and factors like these impact market sentiments.