The BSE Auto index shed 20% between July and end-October before recovering marginally this month. Maruti Suzuki shares have underperformed too, on account of lower car sales
A festive season that lacked sparkle for domestic automobile sales has raised alarm bells among investors. During the 42-day festive period, registrations of vehicles in the domestic market—an indicator of retail sales and consumer sentiment—was down by as much as 11% year-on-year, according to data from analytics firm Crisil Ltd. Passenger vehicles displayed the sharpest decline of 14% in registrations. What’s worrisome is that it is normally a peak period for new vehicle registrations in the country. Worse, the decline comes on the heels of sales contraction in the three months of July, August and September.
The hope was that auto sales will pick up in the festive season. Add to this, dealer inventory—which is normally at 30-35 days during this period—is higher at 40 days.
Perhaps, the trend mirrors the tightness in liquidity in the Indian economy over the last few months. Interest rates have hardened and insurance costs are up, and so are vehicle prices. All of this adds to cost of ownership along with the big jump in fuel costs.
This apart, there were more facelifts (refreshes) than new models launched during this festive season, which did not enthuse customers enough to purchase new vehicles.
Obviously, the strain in auto sales has taken a toll on the share prices of original equipment manufacturers (OEMs). The BSE Auto index shed 20% between July and end-October before recovering marginally this month. Likewise, shares of Maruti Suzuki India Ltd, which makes one out of every two cars sold in the country, also fell on lacklustre sales.
Crisil Research has cut its sales growth forecasts for passenger vehicles from the earlier 9-11% to 7-9% in fiscal year 2019. Some brokerage firms have lowered their forecasts too.
The slowdown in auto sales during the festive season may force OEMs to offer higher discounts and schemes to promote sales in the coming months. This may lead to a margin squeeze, in turn hurting profits. As such, the drop in share prices of auto companies looks justified, especially those with high exposure to passenger vehicles.
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