Why vehicle makers and dealers are bracing for dull festive season

Still hoping for Diwali turnaround but many say this is over-optimism, given the situation thus far

“It doesn’t look like a festive season,” says a dealer for two of the largest automobile brands. 

This summarises the mood of those in the automobile business, at a time when sales typically get a boost. The 40-day period from Navratra and ending with Diwali is considered peak season for automobile companies. As a rule, it accounts for close to a 5 per cent of annual sales for passenger vehicles (PVs) and a third for two-wheelers.

This year is different. A high fuel price and a steep rise in insurance premium outgo, among other factors, have adversely impacted buyer sentiment. 

Two-wheeler makers continue to dispatch high volumes, despite sluggish retail sales, hoping for a turnaround in the trend. However, dealers are worried at sales showing no sign of a pick-up; in which case, they will be forced to offer discounts from their end, to ensure no piling of unsold inventory. 

Average inventory at two-wheeler dealerships across regions from the beginning of Navratri till the end of Dussehra has increased from 15-20 days last year to 45-50 days. For PVs, the number in days for unsold stock has increased to 35-45, from 10-15 last year. “While inventory build-up is normal during a festive season, what is worrisome is that the stock is not moving. Inquiries are not converting into sales,” said a Maharashtra-based dealer of a car company. And, high commodity prices and a falling rupee have led automobile companies to indicate their expectation for a sluggish December quarter. Maruti Suzuki, the car market leader, says it expects the entire second half of 2018-19 (October-March) to be weak.

The quarters are expected to be weighed in by higher insurance and raw material cost, such as of steel, and adverse foreign exchange movement, Ajay Seth, chief financial officer at Maruti, told analysts in a post-earnings conference call last week. Average discount on a Maruti model had risen by Rs 3,600 this festive season, compared to last year, he said. The company is, however, committed to an earlier forecast for double-digit growth in volume in FY19. 

Some are still hoping Diwali will add sparkle to the sales. Two-wheeler market leader Hero MotoCorp, for instance, is hopeful of a pick-up closer to Diwali, despite flattish to negative sales growth during the season so far. Bajaj Auto has announced attractive consumer offers; it expects footfall in showrooms to increase marginally around Diwali, the company told analysts last week.

Not buying

However, neither analysts or dealers are buying into this optimism. “We feel double-digit growth in FY19 will be an uphill task (for Hero), given the current demand environment. Inventory at dealerships is already at an all-time high. And, higher discounting and consumer offers would be a drag on profitability,” wrote Saksham Kaushal and Poorvi Banka, analysts from Prabhudas Lilladher, in an October 16 report. “With the current stock pile-up, we expect discounts on two-wheelers to go up. But, these discounts will be doled out by us, not manufacturers,” said a Hero dealer, explaining it was in the interest of dealers to get rid of the stock, as they need to repay financiers. The latter are anyway being extra-cautious, owing to the liquidity crisis they are facing.

Saharsh Damani, chief executive at the Federation of Automobile Dealer Associations, said: “Unless there is a positive trigger from the economy, we don’t expect the situation on the ground to improve.”  

Increase in insurance costs has been one of the biggest blows for the two- wheeler industry, he added. “This is a very big reason for sales to suffer. There is some clarification from the insurance regulatory body but people  are not aware. Walk-ins have reduced and so have conversions,” he mourned.