The automobile industry has seen a year of declining sales and is struggling to stay afloat. Some things could conspire to ensure 2014-15 is a better year for a key industry. The rupee is likely to remain weak versus the dollar, which means a boost to exports. This will not only affect cars, trucks, motorbikes, etc, but also make a positive difference to the components industry.
A second factor is that inflation seems to be finally coming down. This means the interest rate cycle might have peaked or be close to that. It will take a while for inflation expectations to ease. When expectations ease, consumption demand might rise.
The third factor is a string of excise cuts across several categories of vehicles. The industry has pretty much passed these on wholesale. That's useful since it significantly reduces showroom costs and equated monthly instalments. Again, this could boost demand.
A fourth factor is the good agricultural performance in 2013-14. That usually translates into lagged demand for vehicles - guaranteed if there's a good harvest in succession. The rural and semi-urban market could come to the rescue if that pattern holds.
The Society of Indian Automobile Manufacturers (Siam) generally releases quality data and its projections deserve to be taken seriously. Siam made projections prior to the excise cuts, where it estimated sales would be down through the first half of 2014-15, picking up only in October 2014 or later. The excise cuts might have accelerated that process but probably not much.
Election campaign spending
There is a fifth factor - election campaign spending. This is likely to flood the economy with easy-come, easy-go cash for a brief period. Whatever the colour of that money (most of it will be black due to the ridiculous laws of election funding) it will end in people's pockets. Some of the beneficiaries might buy vehicles with that money.
One could tie all these possibilities together and make a case for a rebound in the auto industry. But it's not guaranteed to happen. There are no signs of consumer confidence picking up. So it might not happen.
One retarding factor is that nobody trusts an interim Budget. It is possible the next government will increase excise rates again. Or move fuel prices (diesel and CNG specifically) closer to market rates.
Another thing is that a large segment of potential buyers could be cash-strapped in the next financial year. Court-mandated orders for green buses have forced urban local bodies across the country to refurbish the public transport system with new CNG buses.
Many of those purchases have been supported by allocations from central programmes like the JNNURM. That programme officially ends in March 2014. It might be revived - perhaps, under another name if the central government changes. Or, it might be mothballed. JNNURM flows or the lack of these could influence public transport vehicle buying.
The auto industry has a fairly long cycle and it's a growth industry in India. This was the first time in 11 years that it suffered a loss of sales in terms of units. Most projections suggest India will become the third largest vehicle market in the world in terms of units sold by 2016 or so.
Sooner or later, there will be a recovery and given the long and complex nature of the industry's supply chain, growth in auto sales would drive overall GDP growth. It is not uncommon for auto makers or component firms to register a massive surge in profits when the cycle changes from bust to boom. This is likely to happen over the next two years, even if it doesn't happen in 2014-15.
The real issue for the value investor is price. This is difficult to call. Excessive liquidity has prevented auto shares from tanking. As such, they look overvalued. But it is true that if the industry does turn around, share prices could double or treble from here over the next two or three years.
