Even as the broader markets are on an uptrend, gaining over 2.2 per cent over the last one week, the BSE Auto Index has shed over 2 per cent in the same period. After sliding 4 per cent in February, auto volumes are expected to be flat or see a fall in March compared to the year-ago period.
Most brokerages have cut their volumes and earnings growth estimates given that the lack of demand, which started from the festival season in October, has continued resulting in higher inventories.
Sharp rise in prices due to upfront insurance payments, especially at a time when the rural demand is low, is aggravating the situation. An analyst at a domestic brokerage expects the BSE Auto index to face more downward pressure in the coming days as demand trends have turned for the worse.
Among the segments which has been the most impacted by the volume slowdown is the two-wheeler market which has an inventory of 8-10 weeks. According to Hetal Gandhi, director, CRISIL Research, elevated fuel prices, weak rural demand in addition to higher cost of ownership (owing to an increase in insurance costs) dampened retail sentiment for the two-wheeler industry.
Analysts expect Bajaj Auto to be less impacted than the rest of the two-wheeler manufacturers, given the higher export base that accounted for 43 per cent of its two-wheeler sales for February.
In addition to higher costs, deferral of discretionary spends is impacting sales of passenger vehicles with inventory levels up to six weeks. The passenger vehicle industry saw lower retail offtake on account of 6-8 per cent higher cost of ownership and launch of more facelifts instead of new models.
While the slowdown after the festival season was expected to be temporary, the recent trends, including production cuts by all manufacturers, indicate that the slowdown could impact sales in April and May. While elections could see a short-term spike, especially for two-wheelers and utility vehicles, analysts believe that this is not enough to offset the sales decline.
Though revenue growth for the March quarter is expected to be muted, margins are also expected to be hit due to higher discounts especially in passenger and commercial vehicles. What could worsen the impact on the consumer is the sharp rise in product cost ahead of the emission norms in April 2020.