These data are from the Society of Indian Automobile Manufacturers (SIAM). While the sales numbers generally seem unexciting, they also signal some growth. But there are issues when we dig deeper. SIAM classifies vehicles despatches from the factory to the dealers as “sales”. However those vehicles may actually remain unsold, and pile up as inventory.
Starting with the festive season, registrations, which means actual sales, have slowed through the second half of 2018-19. According to Fada, (Federation of Automobile Dealers’ Association). which tracks vehicle registrations, total vehicle registrations during the 42-day festive period, which fell between October 10 and November 20 2018, stood at 20,49,391 units. The festive period was between September 21 and November 1 in 2017, and there were total registrations of 23,01,986 units, Fada says. The deseasonalising makes those figures look depressing.
Fada also claims that dealer inventory during October to December 2018 was at an average of 5,52,616 vehicles a month, doubling from 2,75,522 in the same period of a year earlier. By February 2019, inventory was at unsustainable levels with passenger vehicles ranges of 50-60 days, two wheeler ranges of 80-90 days and commercial vehicle ranges of 45-50 days. This was even worse than in January 2019, when passenger vehicles hit 30-35 days while two-wheelers were at 50-60 days and commercial vehicles at 30-35 days.
There are reports that Maruti has cut production by a drastic 25 per cent. Since Maruti holds more than 50 per cent market share in the passenger vehicle segment, it’s reasonable to assume that the inventory situation is pretty serious. These are not the sort of numbers we would expect with an economy that’s supposedly growing at 7 per cent. The auto industry has a long and complex value chain, sourcing multiple types of raw materials (rubber, metals, plastics, etc) and using thousands of different components including both basic forgings and highly sophisticated chips. It’s capital-intensive and provides revenues for the financial services industry, for the advertising industry and for repair and maintenance services. Low demand for vehicles inevitably leads to lower activity across the entire economy.
Auto stocks have taken a hammering recently. The Nifty Auto Index covers 16 companies. Most of these are large caps or giant caps. The index is down 24 per cent in the last year and it’s down 2 per cent in the last month. In contrast, the Nifty itself is up 13 per cent in the last year and up 6 per cent in the last month. Only two of these auto stocks – Bajaj Auto and Bosch – are in the black.
How long do auto industry cycles last? This is a hard one to answer. We’ve seen recessions that have lasted two years, or even longer and obviously, different segments have different cycles and so do specific companies, depending on their export profiles, etc. We have also seen really deep corrections of 65 per cent from the peak sometimes.
The one thing we do know is that India’s auto-majors have scale. They should be able to ride this one out. There could be a case for selectively buying into the recession. But it may be a very long haul before the industry sees a stable recovery.