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No Cheer For The Auto Sector

Monday, January 21, 2013
By Manik Kumar Malakar

The festive cheer of the December period did not extend to the auto sector. Sales in December were down as compared to November especially in the passenger car segment. In other segments like two-wheelers and commercial vehicles sales were either flat or frankly skewed. And over and above all that some passenger car companies have gone in for a price hike in a market that is very price sensitive.

“In December 2012, the majority of the auto segment recorded a month-on-month decline (while few players also recorded a year-on-year decline), due to the shift of the festival season by a month, which lead to higher dispatches in November 2012,” says Mitul Shah of Karvy Stock Broking in a monthly analysis of the auto sector.

Sales in the car segment fell by 4% year-on-year, while UVs (Utility Vehicles) continued outperformance with a growth of 41.6% YoY. MPVs rose 29% YoY in December. A higher discount on cars and M&HCVs were not enough to attract buyers in the month, according to inputs from Karvy.

The motorcycle segment registered a growth of 5.5% YoY, but declined by 0.6% MoM in December 12, while the scooter segment grew 7.2% YoY but again was down by 3.9% MoM. As far as the corporate players in the auto universe go, M&M, Maruti Suzuki, Bajaj Auto and HMSI registered decent volumes. On the other hand Tata Motors, Ashok Leyland and TVS Motor registered subdued volumes with YoY decline. 

Reasons for the decline are manifold. “I think that one of the reasons for falling car sales is the widening gap between petrol and diesel prices which translate into a demand-supply gap,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global. In context, earlier, the gap was around 25% which has now moved to 42%. Traditionally car manufactures gear that offerings towards petrol-fuelled vehicles. But consumers are increasingly choosing cars that run on diesel, which remains subsidised.

Then there is simply tradition and custom too to blame for slackening sales in December. This is always a feature post the Deepavali festival. In December sales go down. These sales subsequently pick-up in February and March for depreciation,” says Kishor P. Ostwal, CMD, CNI Research.

Then there is the technology aspect, too. “New models come out in the months of January / February and customers wait for this,” says Sudip Bandyopadhyay MD & CEO Destimoney Securities. Thus, instead of buying vehicles in December, customers prefer buying new models in the new calendar year.

And the rate policy on auto loans could also be a reason for slackening sales. “Most of the cars are bought through bank loans and the high interest rates have considerably affected the demand for cars,” says K. Jayaraman, Research Associate, Bonanza Portfolio. Remember that people had expected the RBI to soften interest rates in their December policy meet, which did not happen.

“People are worried about the high interest as well as the high operating cost and therefore waiting for clarity in the ensuing budget and RBI’s meet in January for interest review,” continues Jayaraman.

So the RBI has a major role to play in facilitating / boosting vehicle sales, do they? “Yes, definitely. If the RBI reduces rates this would mean that lending rates will come down which will increase the auto demand,” says Dubey. At the macro level not only would the economy improve also the demand scenario will improve.

But it will take time for the benefits to set in. “In long term yes, rate cuts will help. But just one rate cut may not help,” Ostwal cautions. Several rate cuts would be needed before benefits set in. “A rate cut on a continuous basis for the year FY 13 will certainly be a big boost for the auto industry,” says Jayaraman.

In the meanwhile what about the recent price hikes by industry biggies like Hyundai and Maruti? Both companies had announced of price hikes of upto Rs. 20,000 a few days back. Analysts are dismissive of the hike by the auto companies.

“This is an eye wash,” says Ostwal. “They (car companies) hike prices and then offer higher discounts as they believe that Indian customers are typically tempted with discounts. Anything in discount is acceptable,” he continues.

“With the Indian currency’s depreciation vis-à-vis other global currencies, Maruti and Hyundi, didn’t have much choice regarding price hike as they have significant import component in their vehicles,” says Bandyopadhyay.

So at the end of the day macro factors and governmental policies will play a major role in the fortunes of the auto universe this (calendar) year. “Going forward, favourable macro factors could help in reviving economic growth with consequent positive impact on consumer sentiment, which augurs well for demand,” says Dubey.

“Apart from interest rates, the Government policies (in the budget or otherwise) will impact automobile demand,” says Bandyopadhyay. If the duty structure on diesel cars is tweaked adversely, demand may suffer. “Similarly, imposing high duty on import of component or CKD may adversely impact demand,” he opines.

Budget concerns, RBI rate cuts (or lack thereof) and fuel prices notwithstanding a long term perspective may be concerned. “With all the above factors the silver lining is that these setbacks may be short term only as there is great domestic demand for vehicles in India and that is bound to grow for the next few years,” says Jayaraman.

Diesel Decontrol
The government last week partially decontrolled diesel prices. Again analysts did not feel that this decision would affect car sales majorly.

“I don’t think this is going to hurt the demand outlook,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global.

“Diesel prices are only getting partially deregulated,” says Sudip Bandyopadhyay of Destimoney Securities.  Also the price increase will be very gradual. “Thus, the impact on automobile demand will get smoothened. There will be no abrupt disconnect,” Bandyopadhyay continues.

Auto sales in 2013
Sales for the auto universe appear to be rather strained as per ground realities today.

The RBI vis-à-vis rate cuts will have an important role to play for car sales.  “To a great extent, automobile sales in calendar year 2013 (pre-monsoon) will depend on cost of funds. The current high cost of funds does not permit an increase in demand,” says Sudip Bandyopadhyay of Destimoney Securities.

So, once interest cost starts coming down, we may see positive developments on the automobile demand front.

“Stabilising labour problem in some companies and new launches are likely to add more demand. However, we believe domestic demand will relatively weak in H1 CY13 and will improve in the second half,” says Sudip Bandyopadhyay of Destimoney Securities.

“The outlook up to March 2013 in H1 CY13 is not very promising,” says K. Jayaraman of Bonanza Portfolio. The fuel price hike and interest rates should settle down for customers to decide to go in for vehicle purchase and for the demand to pick up.

“Post budget certainly clarity will emerge and stability could be seen thereafter,” he continues.

Auto stocks and the retail investor
“We have a Buy call on Tata Motors, Maruti and Bajaj Auto and Hold view on Hero Moto,” says Uday Narayan Dubey. “We recommend mid to long term investor should buy Auto stock on dips for healthy return. Our buying hypothesis is based on improving domestic macro outlook and new attractive launches,” says Uday Narayan Dubey of R K Global.

“We are not bullish in the automobile sector in the current calendar year (CY13).  Out of the four wheeler companies, we like Maruti at current levels,” says Sudip Bandyopadhyay of Destomoney.

“Auto shares have performed extremely well in the last six months with 50% appreciation approx on leading shares like M&M, Maruti, Tata motors etc.” says K. Jayaraman of Bonanza. “From the investor perspective it is buy only on a correction. Investors who hold it from low levels can partially book profits now and re-enter atleast at 15 t0 20% lower from current levels. M&M can be bought at Rs. 800 levels, Maruti at 1250 to 1300 levels and Tata motors at 265-275 levels,” he continues.

“Sell at every rise,” says Kishor P. Ostwal, of CNI Research. “Once a rate cut happens the global investors will start booking profit. It is well said buy on information and sell on news,” Ostwal ends.

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