From used, rentals, electric cars to NBFC loans, here are the Auto spoilers!
A series of factors have played major spoilsport for automakers which has resulted in weak to subdued sales and hence impacted earnings.
In the past 4 quarters, the auto industry has witnessed serious slowdown in sales. Data given by SBI Ecowrap shows that over a period of 5 years, the total quarterly production of automobile segment grew from 5.66 million in Jun’14 quarter to 7.21 million in Jun’19, a growth of 1.55 million in a quarter. As against this, the quarterly registration number recorded a YoY de growth of 0.32 million during June’19. A series of factors have played major spoilsport for automakers which has resulted in weak to subdued sales and hence impacting earnings on an overall basis.
Notably, during these 5 years, domestic sales as a percentage of production has marginally come down to 84.35% from the Jun’14 level of 85.27%. On the other hand, exports have increased from 14.81% to 16.57%. However, increase has been witnessed in export segment by y 42% in Jun’19 over Jun’14 corroborates with the increased share of exports in overall production.
According to SBI Ecrowrap chief economist, this still does not suffice for the significant decline in automotive production and registrations.
Then who impacted auto sector? Find out!
Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI said, "We believe there are various factors that determine the sales of automobiles in India, i.e., the change in regulatory norms, declining rural demand, subdued global growth, increase in input cost etc, but domestic growth is one of key factor which largely drives growth in automobile sales."
Ghosh highlights few factors which played the role in dragging sales down.
NBFC sector is facing liquidity squeeze since second half of FY19 after a few of the big NBFCs defaulted on their obligations. There has been a slowdown in Mutual fund flows who were a big supplier of credit to the NBFCs. Overall exposure of Mutual Funds to financial sectors decreased by Rs.64000 crore i.e. from Rs.2.66 lakh crore in July’18 to Rs.2.02 lakh crore in June’19.
NBFC were the major financers for customers who do not approach banks, hence, revival of lending by NBFC is also critical and play an important role in Auto demand.
Increase in acquisition cost including insurance, GST, etc.
Starting FY19 to FY21, vehicle prices are on an upward ride due to various safety, insurance and emission norms related compliance costs. For example, ABS for new model kicked in from April 2018, while insurance norms changed since Sept’18. Further ABS for all models was effected from 1st April 2019 while crash test and pedestrian safety norms will be kicking in from 1st Oct’19.
This all put together will increase the acquisition cost by 2-5%. At the top of all this, BS IV norm will be applicable from April 2020 which will further make vehicle acquisition dearer by 2-8%. Impact will be higher on entry level vehicles and in PVs, significantly higher impact on diesel vehicles.
New AXLE load norms enhancing capacity overnight by 20-25%
Last year in July month, the government increased the official maximum load carrying capacity of heavy vehicles, including trucks by 20-25%. The gross vehicle weight of a two-axle truck (two wheels in the front axle and four wheels in the rear) has been increased to 18.5 tonne from the existing 16.2 tonnes, increasing the load carrying capacity by just over 20 per cent.
For a five-axle truck, the vehicle weight has been increased from 37 tonne to 43.5 tonne, increasing the load carrying capacity by more than 25%.
Decision to increase axle load will help in increasing the carrying capacity of goods transport vehicles and bring down logistics cost. The amendment increased the carrying capacity of goods vehicles by about 20-25% and lower logistics costs by about 2%, which ultimately has impacted the fresh sales.
Increase in used car market
Over the past five years, the size of pre-owned market has expanded significantly, with higher share of organised players. In 2018-19, while new car sales were recorded at 3.6 million units, 4 million second-hand cars were bought and sold. India pre-owned car industry is expected to reach between 6.7 to 7.2 million cars/year by FY22.
Impact of car rentals and mobility options!
With more number of options available in terms of car rentals etc. and increasing cost of acquisition of a vehicle coupled with high maintenance cost, there is a tendency of people to shift towards car rentals and other mobility options, especially in the metro and urban areas where there is availability of alternate mobility options.
In absence of clear migration policy towards EV and incentive towards migration to EV creates confusion amongst buyers and some are in wait and watch mode before taking a buying call.
Ghosh said, " Overall, it seems there has been a constellation of factors in explaining decline in auto sales but it seems declining rural demand and liquidity issues are explaining 50% of the reasons for such a fall."