BackAuto industry: Quick recovery? Not so simple
The emphasis on quick recovery has to be understood with some stats that compare the contrast in growth rates prevailing before and after the monsoon
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The automobile industry is one of the few segments of the country that has quickly recovered after a poor show in 2014-15. Much of the volume growth in that year came from two-wheelers. This time, though, in the first eight months of the fiscal year, domestic sales are notably better in the case of commercial and passenger vehicles. Two-wheeler sales are still struggling with a mere 1.7% growth. One may also mention that exports have also grown against the consecutive 12-month decline in Indian exports.
The emphasis on quick recovery has to be understood with some stats that compare the contrast in growth rates prevailing before and after the monsoon.
Commercial vehicles that grew 3.5% in the June quarter has galloped ahead with 8% growth while passenger vehicles grew from 6.2% to 8.5%. Two-wheelers managed only a change from 0.6% to 1.7%.
Based on the balance sheets of major automobile companies in the September results, we plotted the working capital numbers for the past five years. We noticed that a company’s production and sales activities—measured by addition of inventory, debtor and payable days unlike a classical view of inventory and debtors less payables—were heightened this year unlike the past few, indicating that they are ordering more components from vendors (high payables), producing more (high inventory) and stuffing dealer showrooms (high receivables). Maruti Suzuki has seen activity rise by 14 days from 2011 to 2015 and Hero MotoCorp. and TVS Motors saw a rise of 21 days. Bajaj Auto saw it fall by 15 days, but that is largely due to the fact that half their sales came from exports.
The analysis hints at companies trying to push sales ahead of an actual recovery. That said, one thing that clearly emerges from a closer look at the numbers is that new vehicle introductions have helped. So, be it a new truck in the 3718 category or the new Jeeto of M&M or even the new models such as Baleno, Aspire, Kwid or TUV300, all have contributed to the spurt in growth. Moreover, many buyers are being nudged into making a purchase with falling interest rates and lower fuel prices that help lower the cost of ownership.
The simplicity of the analysis ends here and the complexity begins. A follower of monthly trends would note diesel prices are down at the retail level by some 13% while petrol is down half that number at 6.5% over last year’s prices. So, why is that the reverse is true when it comes to car sales? And why are two-wheelers not growing? Petrol car sales have grown approx 15% while the later is up mere approx 1.7% in the nine-month period. Bank lending rates have fallen over the last year by about 100-115 basis points, yet how is that the outstanding bank credit for vehicle loans is up 15.5% while that for transport operators is up just 5.4% as of end-November? One basis point is one-hundredth of a percentage point.
One would expect that when diesel fuel price drops more than petrol, a buyer would prefer a diesel vehicle and likewise a commercial vehicle operator being more sensitive to interest rates would draw down more loans to finance his vehicle.
The complexity unravels when one looks at India in two parts—rural and urban. The rural economy is clearly stressed by two successive deficient monsoons, winter crop losses to unseasonal rains last year and generally reticent increase in minimum support price at which the government buys produce. Moreover, the great switch in the funds sourced by states from the centre—the massive devolution of centre’s revenue to states accompanied by a huge drop in central plan assistance—has cajoled more states to invariably cut short their social spending in favour of urban-centric economic spending. A case in point is that of Karnataka. It has shrunk its social spending out of total expenditure (revenue plus capital) from 39.8% in 2014-15 to 38.8% in 2015-16. Therefore, the rural economy is witnessing a far slower circulation in money compared with that seen by urban economy.
The other explanation for the complexity lies in industrial recovery. The Index of Industrial Production (IIP) is trending up over the last year, registering a growth of 4% between April and September, unlike 2.9% last year.
However, one notices that the index of manufacturing has moved just 3.2 points from May 2014’s 183.5 to September’s 186.7, even as the overall index is up by just 2.7 points from 175.3 to 178.0.
That highlights the fragility of the recovery. The rise in IIP seems merely to be a base effect thus far.
So, what’s up ahead in 2016? All of the above, a high build-up in manufacturer’s activities, the new vehicle introduction momentum, falling cost of ownership, beyond base-effect IIP rise and un-tied state spending in urban areas are trends that are too well-entrenched for 2016 sales not to quicken further.
Mahantesh Sabarad is deputy head of research at SBICAP Securities Ltd.
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