Industry
Are the growth wheels coming off in the cars segment?
Summary
Between May and July, car registrations barely grew as compared to the same period in 2023, and this is putting companies under pressure. The coming festive season will be a moment of reckoning.
It’s rare for industry associations to shoot off letters to each other. When they do, something is usually simmering. There’s indeed some unease in the passenger cars segment, where an association of car dealers and an association of car manufacturers are feuding on the levels of car inventories with dealers.
One backdrop to this unease is how sales growth in passenger cars segment has tapered after earlier benefiting from the post-pandemic pent-up demand and new models. And its true test lies ahead—between September and November, in the festival season.
Data on vehicle registrations from the government portal Vahan shows that between May and July 2024, motor car registrations rose a meagre 1.8% on a year-on-year basis. Most carmakers, big and small, felt the pinch; the top four barely grew. This is making dealers uncomfortable, and making them rail against manufacturers who are allegedly shipping more cars to them. The Federation of Automobile Dealers Associations has reportedly written twice in two months to the Society of Indian Automobile Manufacturers, alleging dumping of stock by manufacturers on dealers.
The next three months will be a time of reckoning. Since 2019, monthly car registrations have topped 300,000 in only six months, and three of those were September, October, and November 2023. That is the baseline the four-wheeler segment will be measured against this festival season. Thus, there’s a lot riding on demand being strong. If demand falters, it could deepen the friction between dealers and manufacturers—and also trigger other second-order effects.
Stock impact
One of those second-order effects is the impact on the financials and share prices of car manufacturers. In the past three years, stocks of all three listed car manufacturers have delivered outstanding returns, beating the overall market by a long way. However, in the past month, all three have trailed the broad market, which is another sign of the circumspection the segment is currently in the grips of.
There are also broader worries. According to government data, private consumption, one of the four components of India’s economic output, grew just 4% in 2023-24—its lowest levels in the last 12 years, excluding the pandemic year of 2020-21. Current share valuations of car companies are rich and embedded with the expectation of strong earnings growth. The Maruti Suzuki stock is trading at about 27 times earnings, Mahindra & Mahindra 33 times and Tata Motors 36 times. If demand fails to match expectations, earnings growth could suffer, and so could their stocks.
State variance
Another second-order impact of weak demand could be on vehicle loans. According to data from the central bank, in the three-year period to June 2024, vehicle loans to individuals (for both four-wheelers and two-wheelers) that are outstanding with banks have grown at a compounded annual rate of 18%. Weaknesses on the demand side could not only slow down future growth, but also strain the current portfolio.
In the three months from May to July 2024, while overall growth for four-wheelers has been muted, states have shown a wide variance. There are 14 states and Union territories where registrations fell on a year-on-year basis. This includes significant markets like Tamil Nadu, Karnataka, Gujarat and Delhi. The two biggest markets by registrations—Maharashtra and Uttar Pradesh—grew just 1.6% and 1.9%, respectively. At the other end of the spectrum, there are 10 states and UTs that grew above 10% during this period, led by Punjab and Haryana.
Two-wheeler solidity
While growth in the four-wheeler segment is plateauing, the two-wheeler segment appears to be in better shape. In 2024 till July, while registrations in the four-wheeler segment grew 7.8%, the two-wheeler segment grew 17.5%. While the industry registered fewer cars in two of those seven months on a year-on-year basis, that has not been the case for two-wheelers, which has grown each month.
However, year-on-year growth shows a wide variance among the major two-wheeler manufacturers in the latest three months (May to July 2024). While registrations of Honda two-wheelers have grown 32%, those of TVS Motor have grown 9%. Bajaj Auto and Hero MotoCorp are the ones showing weakness, with a growth rate of 2.7% and –5.6%, respectively. While the coming festive season holds meaning for them as well, for the four-wheeler segment, this one is shaping to be a moment of reckoning.
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