First half-yearly auto sales slump in 7 years

First half-yearly auto sales slump in 7 years

New Delhi: For the first time in seven years, vehicle sales in India, Asia’s third largest automobile market, have fallen in the first six months of the fiscal year, as expensive consumer credit held back potential buyers.

The news, while not good for the industry and its suppliers as well as banks that finance most of the purchases, also signals deep discounts and bargains for prospective buyers in the coming weeks and months.

Sales volume declined 5.95% year-on-year (Y-o-Y) in the April-September period, with some 4.58 million vehicles sold, compared with 4.87 million in the year-ago period, according to data from the Society of Indian Automobile Manufacturers (SIAM).

While car sales volume grew 12.9%, albeit at a slower pace than in the previous years, two-wheeler sales fell nearly 10%. Data is not available by revenue.

The last half-yearly decline was in the second half of fiscal 2001 when volume of sales shrank 9.5%.

Two-year high inflation rates have had a worried Reserve Bank of India raising its benchmark rate six times in the past 18 months. Even as inflation has climbed down, the central bank’s actions have led to a four percentage point increase in lending rates for automobiles during this period.

As many as 85% of India’s passenger vehicles and 60% of two-wheelers are financed by banks or other financiers.

The decline in sales will likely give more ammunition to auto makers’ demand for assistance from the government via lower excise taxes and export incentives. In a recent annual meeting of SIAM, Union minister for heavy industries and public enterprises Sontosh Mohan Deb claimed that the government could consider actions to boost sales.

The Indian automotive industry, which is entirely private, contributes around 5% of the country’s economic output and 17% of indirect taxes.

A slowdown in vehicle sales was signalled last month in the index of industrial production data, the latest number for which is available till July. In the April-July period, the index for transport equipment and parts grew just 0.3% at a time overall manufacturing rose 10.3%, which, too, reflects an overall deceleration.

Sales of passenger vehicles grew as customers bought new models, such as the Suzuki SX4 and Mahindra-Renault Logan. Passenger vehicle makers, led by Maruti Suzuki India Ltd, the largest car maker by volume of sales, sold 723,973 units in the six months to 30 September, compared with 641,498 in the year-ago period. “Whatever growth we have seen so far is coming only from the new models," said Arvind Saxena, vice-president of Hyundai Motor India Ltd, in an interview last week. “Without these, the growth would have been flat."

The number of passenger vehicles sold in April-September 2006 had risen 20.7%.

The two-wheeler sector has been the hardest-hit. Sales of two-wheelers, the entry level for motor transport in the country and the main mode of commuting, fell 9.5% in the half year to 3.46 million units, compared with 3.82 million in the comparable period a year ago. All major two-wheeler companies, except Honda Motorcycle & Scooter India Pvt. Ltd, which mainly sells scooters, cut production during this period. Hero Honda Motors Ltd, which sells nearly half the two-wheelers in India, has even postponed start of operations at its new Uttarakhand plant until next year.

Meanwhile, auto makers have already started throwing in discounts and gifts, and are introducing new products to boost sales volumes in the coming months. On offer from car makers are a combination of cash discounts, free insurance for limited period, accessories, discounted loan rates and cash for old cars.

Manufacturers are offering rebates totalling up to 10% the price of a car on an average. General Motors India Ltd, for instance, is offering a discount of Rs35,000 and a free MP3 player with its Spark model, while Maruti is offering rebates of up to Rs40,000 on its Zen Estilo model, according to ads in newspapers.

Demand in the automobile industry peaks in the festival season, which starts this Friday, as this coincides with the harvest season, when rural consumers spend more, and with the Hindu festivals of Diwali and Dussehra, when employees receive bonuses. The festivals are considered auspicious for buying new goods and durables. It is also the season for marriages and newly purchased cars and bikes often form part of the illegal, but prevalent custom of dowry.

A prominent New Delhi auto dealer said enquiry levels from customers weren’t what are usually seen in the days leading up to the festival season in other years. Inventory levels continue to be about 15% more than normal stocks, said Prem Bagga, president of the Automobile Traders Association of Delhi and distributor for Bajaj two-wheelers and Maruti cars.

But “all dealers have stocked up in expectations of good sales", he added.

Car sales could grow stronger in the second half of the current fiscal, an analyst said. “We are looking at a pick-up in volumes, with interest rates softening and new products coming into the market," said Ashutosh Goel, an analyst with Edelweiss Securities Ltd.

Bike makers, too, are offering discounted interest rates and free gifts to attract buyers, as they introduce new products to bring customers into showrooms while new financiers such as Reliance Money Ltd aggressively lower lending rates to gain share in the auto credit market.

Bajaj Auto Ltd, India’s second largest two-wheeler maker, is offering a subsidized 8.5%—about 2% less than normal rates—loan rate on certain models such as the Discover. Hero Honda traditionally offers a gift, such as mobile phones, during this period and said it would do so this year, too. Kinetic Motor Co. Ltd has started gifting two round-trip air tickets to any destination in India with select models.

Hero Honda and Bajaj Auto, along with TVS Motor Co. Ltd, the No. 3 two-wheeler seller, are introducing new products this season. Bajaj has unveiled the XCD motorcycle and TVS, its Flame model.

The other segment, which has been hit by higher interest rates and inflation, is commercial vehicles, where growth has slowed down to 2.9% in the first half of this fiscal, compared with a 37% Y-o-Y surge in April-September last year.

Analysts believe growth in this segment will continue to be flat in the second half as inventories pile up at dealers and freight rates remain stable. “There won’t be much improvement (in truck sales) since companies will have to clear the inventory that has built up in the system," said S. Ramnath, vice-president at SSKI Securities Ltd.

Auto shares have underperformed the overall market during last year. The Bombay Stock Exchange’s auto index rose 12.07% in the last 12 months, while the bourse’s 30-share benchmark index, the Sensex, grew 42.73%. Auto makers will begin reporting their second quarter financial results starting 22 October.