Auto numbers have a story to tell

The Q2 (July-Sep 2018) results are hard to analyse, due to the unusual activity during July-Sep 2017, a year ago. The GST (goods and services tax) was launched in July 2017 and it caused a period of serious disruption. It is possible to deseasonalise repetitive events like festivals with some confidence, due to data accumulation over many years. But GST was a one-off.

A look at the auto industry may be useful. In June 2017, carmakers cut down production due to the provision, that GST would not be available for left-over stock. Despatches in June 2017 were very low. In contrast, despatches through July-Sep 2017 were abnormally high as carmakers compensated for a lean month.

Looking at passenger vehicles, only 193,843 units were despatched to dealers in June 2017, while 292,543 units were despatched in July 2017. August 2017 saw 289,913 despatches and September 2017 clocked 304,765 units. That's a total of 1.08 million units in those four months, and a total of 887,221 units in Q2, 2017-18, working out to an average of 295,740 units per month, in Q2.

A year later, in June 2018, we saw 268,695 despatches, while July 2018 was 285,735 units, August 2018 was 282,809 unit and September 2018 was 288,805 units. That works out to a total of 1.126 million units over four months and a total of 857,349 units in Q2, 2018-19. The Q2, 2018-19 average is 285,783 units per month - 10,000 less than a year ago. But, about 45,000 more units year-on-year, were sold across the four-month period, June-Sep 2018. Inventory levels were high by end-September 2018, with dealers reporting that they were holding an extra 10 days or more, due to anticipated sales during the Navrati-Diwali period. 

What does one make of these figures? The Q2, 2018-19 is three per cent lower in terms of unit sales but June 2018 was obviously a huge improvement year-on-year and the four-month period shows three per cent improvement in despatches. Many large auto manufacturers are unlisted. So we don't have a definite picture of margins. Maruti's margins were hit by higher raw material costs and weak rupee in Q2. Similar factors could have been in play for other manufacturers.

In 2018, unit costs are up on paper at least, with most carmakers raising prices due to rising raw material inputs. But there are also massive discounts on offer, so that is nullified in practice. EMIs are up due to rising interest costs - this may be more important since the bulk of car sales are on EMI. Insurance premiums are up. High fuel prices could be another disincentive for buyers and floods in Kerala washed out the festive season there.

The October sales numbers will be crucial as will the November numbers. That was festive season across North and Eastern India, and of course, this continues into early November. This is the busy season with up to 30 per cent of annual sales generally being logged during this period. If dealers could shift the extra inventory, as they hope, sales in October and November would be high. The numbers will be released by the end of this week and these data will undoubtedly influence the share prices of auto stocks going forward.

The automobile segment probably has the longest value-chain of any given industry. It starts with primary metal miners at one end, and continues through to NBFCs, advertising and marketing agencies and movie stars, with a large ecosystem of R&D, manufacturing and assembly thrown in. It is also a good indicator of consumption demand. What happens here will indicate what happens to consumption and, given the long chain, it will be an excellent indicator of earnings across many sectors.