The new financial year has started with encouraging domestic sales figures released by several of the automobile majors. For example, Maruti saw a 27 per cent increase year-on-year (YoY) in unit car sales in April 2015 while Mahindra & Mahindra saw one per cent growth. Among unlisted four-wheeler manufacturers, Honda, Hyundai and Toyota also saw double-digit growth. Industry watchers pointed out that there could be a base effect since April 2014 sales were quite low.
However, overall, the 2014-15 financial year also seems to have seen a revival in domestic sales. Unit domestic sales of four-wheelers rose by four per cent in 2014-15 over the corresponding 12 months of 2013-14. Since 2013-14 and 2012-13 both saw declining unit car sales, the auto industry may have finally pulled out of the doldrums. The May 2015 figures will be indicative since sales had risen in May 2014 and YoY growth would not need to be adjusted for a low base. Two wheeler and three-wheeler sales also grew in fiscal 2014-15 by eight per cent and 11 per cent, respectively.
Two segments showed de-growth, however. One was light commercial vehicles (LCVs), which shrank by 11.6 per cent. The other was tractor sales, which shrank by 13 per cent on the back of a deficit monsoon.
There may have been several drivers for the overall improvement. Excise duty was cut for instance, precisely in order to offer a stimulus to auto sales. Also, most dealers offered serious discounts in order to move stock. Fuel prices fell due to low international crude prices.
Projections from the industry body, SIAM suggest that domestic car sales should grow at about five per cent in 2015-16. However, tractors could continue to see de-growth and there is apprehension that a second poor monsoon in succession could lead to serious falls in rural and semi-urban demand, not just for tractors, but also for two wheelers and LCVs. Balanced against that, interest rates are expected to fall through 2015-16, which will both stimulate demand and also reduce costs for the working-capital- intensive auto industry.
On exports, 2014-15 saw a very impressive performance. Passenger car exports grew by four per cent and commercial vehicle sales grew 10 per cent while two wheeler sales jumped 23 per cent. Overall, unit exports grew by 15 per cent to about 3.57 million vehicles versus 3.11 million vehicles in 2013-14. This performance is especially commendable since the rupee stayed strong through most of the fiscal and global demand was, in general, weak.
In all, there is room for optimism. If the auto industry is pulling out of a trough, it could indicate overall improvement in economic health. The industry has a long value-chain, and employs many people. A pickup will have a positive effect on everything from demand for basic metals and commodities to service sectors like advertising.
The industry tends to have fairly long cycles. The major issue is high valuations. The CNX Auto Index, a free-float weighted index of 15 auto related shares, contains seven auto-ancillaries and eight vehicle manufacturers spread across the space. In the last 12 months, the index has moved up by 41 per cent, while the index PE has risen from 26 in May 2014 to 52 in May 2015. (The NSE methodology uses standalone PEs whereas consolidated may be more indicative).
In highly cyclical sectors, earnings can rise very quickly when there is a confirmed turnaround. We may see a situation where share prices rise while PE falls if earnings growth accelerates. But ideally, one would look to buy into the sector during corrections.
However, overall, the 2014-15 financial year also seems to have seen a revival in domestic sales. Unit domestic sales of four-wheelers rose by four per cent in 2014-15 over the corresponding 12 months of 2013-14. Since 2013-14 and 2012-13 both saw declining unit car sales, the auto industry may have finally pulled out of the doldrums. The May 2015 figures will be indicative since sales had risen in May 2014 and YoY growth would not need to be adjusted for a low base. Two wheeler and three-wheeler sales also grew in fiscal 2014-15 by eight per cent and 11 per cent, respectively.
Two segments showed de-growth, however. One was light commercial vehicles (LCVs), which shrank by 11.6 per cent. The other was tractor sales, which shrank by 13 per cent on the back of a deficit monsoon.
There may have been several drivers for the overall improvement. Excise duty was cut for instance, precisely in order to offer a stimulus to auto sales. Also, most dealers offered serious discounts in order to move stock. Fuel prices fell due to low international crude prices.
Projections from the industry body, SIAM suggest that domestic car sales should grow at about five per cent in 2015-16. However, tractors could continue to see de-growth and there is apprehension that a second poor monsoon in succession could lead to serious falls in rural and semi-urban demand, not just for tractors, but also for two wheelers and LCVs. Balanced against that, interest rates are expected to fall through 2015-16, which will both stimulate demand and also reduce costs for the working-capital- intensive auto industry.
On exports, 2014-15 saw a very impressive performance. Passenger car exports grew by four per cent and commercial vehicle sales grew 10 per cent while two wheeler sales jumped 23 per cent. Overall, unit exports grew by 15 per cent to about 3.57 million vehicles versus 3.11 million vehicles in 2013-14. This performance is especially commendable since the rupee stayed strong through most of the fiscal and global demand was, in general, weak.
In all, there is room for optimism. If the auto industry is pulling out of a trough, it could indicate overall improvement in economic health. The industry has a long value-chain, and employs many people. A pickup will have a positive effect on everything from demand for basic metals and commodities to service sectors like advertising.
The industry tends to have fairly long cycles. The major issue is high valuations. The CNX Auto Index, a free-float weighted index of 15 auto related shares, contains seven auto-ancillaries and eight vehicle manufacturers spread across the space. In the last 12 months, the index has moved up by 41 per cent, while the index PE has risen from 26 in May 2014 to 52 in May 2015. (The NSE methodology uses standalone PEs whereas consolidated may be more indicative).
In highly cyclical sectors, earnings can rise very quickly when there is a confirmed turnaround. We may see a situation where share prices rise while PE falls if earnings growth accelerates. But ideally, one would look to buy into the sector during corrections.
The author is a technical and equity analyst