Mumbai: Automobile sales are decelerating, and incentives and discounts are not helping shore up demand. The uncertain outlook and mounting unsold inventory have compelled companies to cut production in the March quarter. The auto sector is thus faced with earnings downgrades for the next two years.

Motilal Oswal Securities Ltd, a leading brokerage firm, in its March quarter preview, has cut earnings estimates for FY20 and FY21 for all 8 original equipment manufacturers (OEMs) that it covers. In contrast to the expectations of a turnaround in fortunes during the March quarter, which typically registers strong numbers for the sector, the net profit of almost all auto companies may witness double-digit declines for the fourth consecutive quarter.

Recent data from the Society of Indian Automobile Manufacturers (SIAM) shows that vehicle production in FY19 grew 6.3% year-on-year. This was not even half the growth witnessed in FY18.

The headwinds are strengthening. A truant 2019 monsoon, rampant rural distress led by weak farm income, increasing influence of shared mobility in urban areas, a rise in unemployment and the liquidity crunch are roadblocks to improved consumer sentiment. Pre-election sales of vehicles have also dipped in the past.

All these point to a weak demand until after the elections.

Therefore, any improvement in sales can be expected only in the second half of FY20, beginning from the festival season, say analysts. There is hope of pre-buying in the March quarter of FY20, just before the BS-VI emission norms kick in. This is likely to substantially increase vehicle costs. Unfortunately, such regulatory changes have coincided with a cyclical downturn that would weigh on demand.

One would have expected some relief in margins on account of softer commodity prices. However, the forthcoming results are not expected to factor much gains. Low sales will translate to low operating leverage, which will weigh on profitability. “Weak demand is bringing in margin pressure from higher customer acquisition costs (marketing), as well as negative operating leverage," says IIFL Research.

ALSO READ | India's $70 billion car market could use a jump

In the auto sector, two-wheeler makers will feel more pain than commercial and passenger vehicle firms. Also, demand for two-wheelers may take longer to revive because of prolonged weakness in rural demand.

Siam’s outlook for FY20 is not encouraging with single-digit growth estimates in sales across most sub-sectors, except commercial vehicles.

No wonder auto stocks have been hammered on the Street since August, when the first signs of weakening sales were visible.

The Nifty Auto index has shed 33% in a year, widely under-pacing the Nifty 500 index for the first time in a decade. The only silver lining is that the valuations have come off.

Close