Auto manufacturers focused on the consumer sector did reasonably well in the festive period during October and November. Maruti Suzuki India Ltd reported an increase of 19.4% in domestic sales during the period, helped by new product launches such as SX4, the diesel version of Swift and Zen Estilo.

Motorcycle sales of Hero Honda Motors Ltd, Bajaj Auto Ltd and TVS Motor Co. fell 2.7% during the same period to 1.24 million units.

Compared with Maruti’s performance, motorcycle sales seem poor. But note that this segment has been hit the most because of the increase in interest rates this year. During last year’s festival season, not only were interest rates much lower, but consumers were also pampered with 0% finance schemes. With the increase in interest rates earlier this year, defaults increased and banks were reluctant to even disburse two-wheeler loans, leave alone peddle 0% finance schemes.

Given the sharp reversal in the credit scenario, it’s good that motorcycle manufacturers came close to last year’s numbers. Hero Honda even improved upon last year’s numbers, growing sales by 1.5% during the festive period. Bajaj Auto reported a 1.5% drop in sales, apparently because of production constraints. TVS Motor was the worst of the lot, with its motorcycle sales falling as much as 22.5%. The company suffered because of a lack of new product launches. The company’s plans to introduce ‘Flame’ have gotten delayed and analysts say that the opportunity to gain market share during the festive season has been lost by the company. Passenger car purchasers, on the other hand, aren’t as sensitive to interest rate changes, given their higher disposable income.

The auto company also benefited from the lack of major launches by competitors. This helped the company gain considerable market share this year.

As far as the share price performance goes, it’s interesting to see that Maruti has gained just 6% this calendar year, despite its outperformance as far as volume growth goes. Hero Honda shares also reflected the pressure on two-wheeler sales, dropping 10% since January. TVS shares fell much more (22%) for obvious reasons. But Bajaj Auto, which has seen sales drop by 10% this fiscal, has maintained its valuations at January levels, on the back hopes that its new bike launch, ‘XCD,’ will reverse its fortunes.

Auto stocks have started going up recently and the Bombay Stock Exchange (BSE) Auto Index has outperformed the Sensex not only in the past week but also in the last one month. That’s probably justified by the fact that interest rates appear to have topped out, with deposit growth in banks outstripping credit growth and a marginal slowdown in the economy. But will lower capital inflows tighten liquidity and hence interest rates? If it does, the Reserve Bank of India can always infuse liquidity by reducing the cash reserve ratio. With auto sales doing reasonably well under the current circumstances, the market seems to be looking forward to better days ahead for the sector.


If the November numbers for the ABN Amro Bank NV’s Purchasing Managers Index (PMI) are right, manufacturing growth has been strong in November. However, the headline PMI number for November, at 60.9, is a tad less impressive than October’s 61.7. (A reading above 50 indicates an expanding manufacturing sector, and the greater the divergence from 50, the greater the rate of change).

Unfortunately, the PMI numbers do not agree with the data on the Index of Industrial Production (IIP). For instance, although the manufacturing index within the IIP was higher year-on-year by 6.6%, the PMI headline number was a high 59.3. Contrast that to the PMI of 53.6 in April, when manufacturing growth was 12.4%. Clearly, there’s a disconnect between the two indices.

Of course, the PMI data is limited to 500 companies and, unlike the IIP, is seasonally adjusted. A one-to-one correspondence between the IIP and the PMI clearly doesn’t exist, says Gaurav Kapur, senior economist with ABN Amro. He says it’s the new orders that make a difference. “When these new orders translate into output, they get reflected in the IIP," adds Kapur.

It’s true that the PMI’s new order index has been the most robust, outperforming the headline PMI index every month. It does therefore give an upward bias to the PMI. However, the PMI’s output index, which should correspond most closely to the IIP’s manufacturing index, doesn’t really show a close correlation with it. And the seasonally unadjusted numbers show an even greater divergence from the IIP trends. Much, therefore, needs to be done to revise the IIP on the one hand and perhaps to increase the PMI’s sample size on the other hand.

Meanwhile, the key takeaway from the November PMI data is that new orders, including export orders, are seeing robust growth. That manufacturing companies are operating flat out is also seen from the fact that November is the third consecutive month for the suppliers’ delivery index to be below 50, indicating the pressure on vendors. The ability of manufacturers to charge higher output prices, seen from the 54.1 reading of the Output Price Index, is another indication of the strength of manufacturing demand. But confirmation of these trends will be seen after the IIP data for October are out.

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