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Interest rates push Q1 auto sales to first decline in six years

Interest rates push Q1 auto sales to first decline in six years
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First Published: Wed, Jul 11 2007. 01 11 AM IST

Updated: Wed, Jul 11 2007. 01 11 AM IST
Vehicle sales in India, Asia’s fourth largest automobile market, fell in the quarter ended June, the first decline in six years, as buyers postponed or avoided purchases smarting from five-year-high lending rates.
Vehicle sales fell 5.6% in the period and the slump is expected to extend into the second quarter of this fiscal year.
In the quarter ended June, 2.27 million units were sold, compared with 2.4 million units in the same period a year ago. The last quarterly decline was in the three months ending June 2001.
Manufacturers are betting that demand will revive in the second half of fiscal 2008, coinciding with the festive period starting October.
With inflation touching a two-year high, India’s central bank, the Reserve Bank of India, has raised its benchmark rate six times in the past 18 months.
This has led to a four percentage point increase in vehicle lending rates during this period, even though the overall inflation rate has since come down.
Sales of passenger vehicles still grew 13% as customers were enticed by new models, such as the Suzuki SX4 and Mahindra Renault Logan.
The country’s largest carmaker by volume sales, Maruti Udyog Ltd, reported a 17% increase in quarterly sales to 160,604 units, driven by demand for the Suzuki SX4 model.
Sales of motorcycles , the entry level for motor transport in the country for many Indians, were the hardest hit.
After years of double-digit growth, two-wheeler sales declined by 8.9% in the quarter to 1.7 million units compared with 1.9 million units a year ago, as lending rates crimped demand and rising input costs prevented companies from offering further discounts.
All two-wheeler companies, except Honda Motorcycle and Scooters India, which mainly sells scooters, cut production in the quarter as inventories piled up at dealers.
Hero Honda Motors Ltd, the country’s largest two-wheeler maker, is delaying start of production in its third factory.
“We hope to see a turnaround by October,” said K. Chandramouli, vice-president of sales and marketing at TVS Motor Co. Ltd, India’s third largest two-wheeler maker. “After the monsoon, the festival season starts and we are hopeful of 10% growth for the year as we launch two more bikes.”
Demand in the two-wheeler industry is the highest in the third quarter as this coincides with the harvest season, when rural consumers have more money in their wallets, and with the Hindu festivals of Diwali and Dussehra.
The festivals are considered auspicious for buying new goods and durables.
“This (dampened demand) is due to an increase in the cost of ownership backed by tightening finance norms by finance companies and high interest rate regime,” wrote Vaishali Jajoo, an analyst with Angel Broking in a recent earnings preview note.
Finance firms are asking for a greater portion of the downpayment and willing to lend less.
The other segment, which has been hit by the interest rates and inflation, is commercial vehicles, where growth has dwindled to 3.8% after three years of growing at more than 20% each quarter.
“Higher interest rates affect the profitability of the truck operators,’ said S. Ramnath, vice-president at SSKI Securities.
Interest costs account for approximately 16% of the total operating costs of a truck, the remaining being mostly fuel and maintenance costs.
Kush Verma contributed to this story.
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First Published: Wed, Jul 11 2007. 01 11 AM IST