Sector notes | India’s automobile recovery is easier said than done

Last month, India Ratings and Research (Ind-Ra) came out with its diagnosis, saying automobile sales were affected by “lower credit availability owing to a liquidity crunch in the non-banking finance company (NBFC) sector, which is main source of funding for commercial vehicles (CVs)”.

The Ind-Ra report is an analysis of March car sales when the industry suffered a 14 percent slide.

But the Reserve Bank of India has a contrarian view. Its April 25 memo instead says the recent slowdown in the automobile sector is “unlikely” to be “driven by the minor blip in the growth of NBFC vehicle credit”.

It backs up the argument, saying NBFC vehicle loan as a share of the total vehicle credit in India has steadily risen over the past few years. Though this growth lost steam since June last year, it is still much higher than the average in 2017.

However, the worrying point is overall vehicle credit growth has been going all downhill. According to RBI data, vehicle loans grew at 6.5 percent in March from a year ago. The figure stood at 7.8 percent in February and 8.6 percent in January. The falling pattern is clearly visible, considering the double-digit growth in early years of 2018.

In any case, Maruti’s sales numbers reflect more of the passenger market side, which is chiefly dependent on banks. The data points for commercial vehicles don’t paint a pretty picture either.

All medium and heavy commercial vehicle (MHCV) makers barring Tata Motors saw sales drop for March. While Mahindra and Mahindra’s CV volumes tumbled 33.4 percent YoY, Ashok Leyland and Eicher Motors saw slide of 6 percent and 7.8 percent, respectively. Only Tata Motors bucked the trend and reported 1.9 percent growth.

Interestingly, both the RBI memo and the Ind-Ra report agree on one aspect – India’s automobile market, especially the car segment, has largely been affected by boiling oil prices.

Subdued consumer sentiment is not helping the matter, bogged down by higher vehicle prices and increase in insurance premium, among other issues.

Where does it all go from here?

In the more immediate term, things may not look great for the automobile industry, but may settle over the medium-to-long term.

Implementation of Bharat stage-VI emission norms starting April 2020 is also seen to play out for the industry, especially for passenger vehicles. Post-deregulation of diesel prices, demand for such cars has taken a big knock.

Maruti has already made a big move, announcing its decision to discontinue diesel engine cars starting April 2020, citing cost disadvantage of BS-VI upgradation, which will increase the pricing gap between petrol and diesel cars by as much as Rs 2.5 lakh. Others, too, may follow suit.

It could be a different ballgame for commercial vehicles though, which run on diesel. The catch is the liquidity crunch, which may be a big overhang.

Interest rate differential is another factor to reckon with. Rates of interest across NBFCs are usually higher than banks. So, if banks continue to stay tight on CV loans, the downtrend may still stay on.

Even regulations play their part in the overall scheme. The new guidelines on the new axle load, which kicked in last year, extended load carrying capacity of the existing vehicles. However, CV sales did not go up as existing ones could carry more. The trend can change if sectors like consumer packaged goods and construction grow at a faster clip, which could stoke demand for transportation.

The current elections too are holding back prospective buyers, who are waiting for the next full-year Budget under the new government. It is quite natural to expect fresh investments only after the Budget.

The connection between monsoon and auto sales is also a factor. Better rains lead to more disposable income. This coupled with likely sops for farmers are going to boost spending.

The auto landscape is changing faster than you think. With BS-VI coming and a likely ban on diesel cars, electric cars and hybrid vehicles could be the future.

Till then, keep your fingers crossed.