Jan 15, 2017 01:05 PM IST IST | Source: Moneycontrol.com

Demonetisation set to put brakes on auto's Q3 earnings

New vehicle purchases nosedived in November and December after the government junked popular bank notes, while bookings and enquiries are understood to have fallen by half during the same period.

Swaraj Baggonkar
Moneycontrol Bureau

Automotive companies are likely to report a sharp hit on their third quarter earnings on account of demonetisation, which has crippled wholesale and retail off-takes over the past two months.

New vehicle purchases nosedived in November and December after the government junked popular bank notes, while bookings and enquiries are understood to have fallen by half during the same period.

Automotive sales hit a 16-year low last month with steep drops witnessed in two-wheelers and passenger cars. Automakers sold 19 percent fewer vehicles compared to the same month last year. The drop was 5.5 percent in November, according to data shared by the Society of Indian Automobile Manufacturers. October remained a bright spot registering a growth of 8 percent during the festive period of Diwali.

“In Q3 of FY17, automobile industry witnessed slump in volumes on account of government’s demonetisation initiative,” said Karvy Stock Broking in its report. “Both November and December 2016 witnessed YoY decline across majority of the segments. Apart from cash crunch, negative sentiment and uncertainty on government’s policy also restricted consumption by buyers, despite better monsoon.”

Passenger vehicle sales grew mildly by 1.8 percent during the quarter to 749,480 units as against 736,253 units sold in the same quarter a year ago. The growth is largely due to robust sales clocked during October which accounted for 37 percent of total sales during the quarter.

Sales of two-wheelers were the worst hit, registering a fall of nearly 5 percent during the quarter to 3.95 million as against 4.14 million sold in the same quarter last year. In December alone, sales plummeted by 22 percent, according to data from the Society of Indian Automobile Manufacturers. More than half of two-wheeler volumes depend on the rural areas. Post demonetisation, the rural belt has been adversely affected, resulting in fall in retail demand.

Volumes of commercial vehicles, too, came under pressure during the quarter, posting a fall of 1.1 percent to 165,308 units as compared to 167,202 units sold during the same quarter last year.

To make matters worse, most commodity prices have gone up. “Commodity prices have moved up sequentially, with an increase of 10 percent (34 percent YoY) in global steel and 1 percent (6 percent YoY) in aluminum prices,” stated a report from Quant Capital. “In comparison, domestic rubber prices declined by 18 percent (4 percent y-o-y).”

In addition, companies were compelled to offer steep discounts to entice customers at a time when dealers were eager to push out their 2016 stock, given the reluctance to buy vehicles built during the previous year. Some older generation models were being sold at a discount of Rs 1 lakh or 15 percent lower than their value. 

“Due to higher inventory push and liquidity issue, discount levels were high to push sales during the second half of Q3FY17,” stated the Karvy report. “Therefore, profitability of auto companies would witness dual impact of low volume and higher discounts. We expect YoY as well as QoQ decline in operating margins for our coverage universe.”

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