Passenger vehicle sales grew a modest 7.42 per cent annually in the April-August period. But probe deeper, and an alarming set of numbers comes to light.
If utility vehicles are excluded, car sales actually increased a mere 0.86 per cent in the five-month period. Besides, the seven per cent growth is aided by a very small base. Sales have actually fallen from an average 210,000 a month in 2010-11 to 184,358 units in August this year. The reason — a combination of surging fuel prices and high interest rates.
Last month, sales of passenger cars plummeted 18.56 per cent year-on-year to 118,142 units — the sharpest decline in about 10 months. But what sparked off concern on the health of the domestic automobile industry was the fact that for first time since January 2009, two-wheeler sales declined, falling 4.50 per cent to 1.06 million units. About 40 per cent of two-wheeler sales are accounted for by non-metro markets, where weak macroeconomic conditions and uncertain monsoons led to buyers deferring purchases.
“The past two months have been really tough. I don’t expect September to be better. We have seen a drop in retail sales and our stocks are rising,” says Pawan Munjal, managing director and chief executive officer, Hero MotoCorp. The market leader, which saw its inventory accumulate over the last few months, slashed production about 14 per cent to 443,026 units in August.
“We expect retail sales to rise during the coming festive season. The future depends on the coming months,” Munjal adds.
Industry experts say two-wheelers do not come in diesel variants, and buyers are feeling the pinch of rising petrol prices. The shift in consumer preference is glaring in the passenger vehicle industry, in which, through the last year, the market has moved rapidly towards diesel engines, leaving car makers saddled with idle capacity in petrol vehicles. Forty per cent of Maruti Suzuki’s petrol capacity, for instance, is currently unused.
Latest industry data show between April and July, while diesel vehicle sales rose 54 per cent (this may now be hit, with diesel prices rising Rs 5 a litre), petrol vehicle sales slumped about 20 per cent. As a result, huge discounts are being offered on petrol-powered vehicles. This has exerted pressure on profit margins. Maruti Suzuki’s net fell 23 per cent to Rs 424 crore in the quarter ended June.
It is with this baggage that car makers enter the festive season. To sell petrol variants, they have no option, but to dole out insurance benefits, exchange bonuses, cash discounts and freebies ranging from LED TVs to air-conditioners. Hyundai and Honda are offering cash benefits of up to Rs 60,000. And, these schemes are likely to be extended.
Typically, car sales rise 15-20 per cent during the festive season and, therefore, help car companies rationalise inventories. However, P Balendran, vice-president (corporate affairs), General Motors India, is cautious this year. “Given the market conditions, we do not expect more than 5-10 per cent incremental sales during the festive season,” he says. The company is offering cash benefits of up to Rs 1 lakh across its range of products. Sriram Padmanabhan, general manager (marketing), Ford India, is more optimistic; he hopes aggressive marketing would help the company’s sales rise 20-25 per cent this season.
To lure customers, car makers are hastening launches. Among the models to be unveiled this October are the Chevrolet Sail (hatchback and sedan), Maruti Suzuki Alto, Skoda Fabia Scout, Tata Safari Storme, Nissan Evalia, Mahindra & Mahindra Quanto, Ashok Leyland Stile, Mercedes-Benz B Class Sports Tourer.
Market leader Maruti Suzuki is ramping up production capacity at its Manesar facility. “Maruti Suzuki was down 2.5 per cent till August this year, which dragged down industry numbers. If you leave Maruti Suzuki out, the other companies grew 14 per cent in this period. Now, with the company saying it would grow 10 per cent this financial year, the industry may also be expected to record similar numbers,” says a senior executive at a leading automobile company.
At such growth levels, passenger vehicle sales would miss the Society of Indian Automobile Manufacturers (Siam)’s projection of 11-13 per cent for this financial year. “We are facing the most challenging times since 2009. If the negative trend continues in September, we will have to revise our target downwards,” said Sugato Sen, senior director, Siam.
Reading the cues early, Bajaj Auto had put on hold back its investment for setting up a fourth manufacturing facility in Gujarat. Managing Director Rajiv Bajaj had told Business Standard the company would first see how the market developed. “The economic conditions are uncertain; we want to be prudent. If there is a meltdown, we don’t want to be caught on the wrong foot,” he had said.
Confusion over the policy framework, both at the central and state government levels, has stalled investment from companies such as Toyota Kirloskar Motor, Hyundai India, Volkswagen and Mahindra & Mahindra. While Hyundai deferred Rs 400-crore investment for setting up a diesel engine plant due to uncertainty over fuel pricing at the central level, Mahindra & Mahindra and Volkswagen have together held back investments of Rs 6,000 crore, owing to an issue regarding refund of value-added tax by the Maharashtra government.
Maruti Suzuki, however, decided to invest Rs 2,600 crore to commission a new diesel engine plant and step up work at its research and development centre in Rohtak, Haryana.
Investments in fresh capacity have fallen from over Rs 13,000 crore (announced by Peugeot Citreon, Ford and Maruti Suzuki and Honda Motorcycle and Scooter India for new units last year) to Rs 2,575 crore this financial year. Only Hero MotoCorp has announced plans to add capacity. The company is investing Rs 2,575 crore on two new units and an integrated research and development facility by 2014-end. Peugeot Citreon has temporarily held back investments, owing to massive cost-cutting programmes at the company’s headquarters.
This is the second of a five-part series on the slowdown that companies are facing