Among automakers, the feeling is bad roads are ending

Automakers, buffeted by rising input costs and feeble demand, got an unexpected mood-elevator last Tuesday from Mint Road.

Duvvuri Subbarao’s larger-than-expected slashing of the repo rate (50 basis points, or bps, to 8%) has raised hopes for a segment that has borne the brunt of 13 rate hikes between March 2010 and October 2011 that cranked up systemic interest rates by 375 bps.

The Reserve Bank of India governor’s move is seen providing the proverbial light.

“Even a small cut in interest rate helps improve business sentiment. For, 70% of retail sales of cars happen through loans,” said Shashank Srivastava, chief general manager of marketing at Maruti Suzuki, India’s largest automaker.

Pawan Goenka, president of automotive and farm equipment sectors at Mahindra & Mahindra, agreed: “It will help bring back the momentum.”

Momentum has been the biggest casualty in recent times.
In the last fiscal, the car segment grew just 2.2%, while the overall passenger vehicles segment grew 4.6%, according to the Society of Indian Automobile Manufacturers.

That’s the lowest growth in three years, since fiscal 2009, when sales rose a bare 1.4% as the global financial crisis festered.
Over the next two years, sales leapt 25% and 29%, respectively.
In the just-ended fiscal, automakers sold 31.25 lakh passenger vehicles, a sparse 6.11% more than the 29.45 lakh in the year before.

Worries of an excise duty hike in the Union Budget hefted sales in March dramatically.

As a result, analysts were expecting subsequent sales to tail off.
But what a change in sentiment a week can make.

The State Bank of India, the biggest lender, has said it will reduce auto loan rates by as much as 50 bps.

Sumit Bali, CEO of Kotak Prime, a car loan provider, said his company will pass on around 25 bps of the cut.

“But we aren’t expecting a huge impact as these are just sentiment-boosters. The positive news is, at least, that there won’t be any further rate hike. So I think the worst is over. We are expecting higher single-digit growth for the first quarter,” Bali said.
Shekar Viswanathan, deputy managing director of commercial operations at Toyota Kirloskar Motors, concurred with Srivastava.

“The RBI made a timely effort of reducing the rates. The impact won’t be significant, but it will boost sentiment,” he said.
The actual effect of the rate cut, however, is expected only in the second half of the year.

“And it will work in favour of the commercial vehicles market, which is heavily dependent on loans. It will be easy for the fleet operators and transporters to take a decision on changing their fleet,” said Abhishek Banerjee, senior analyst at Asian Market Securities.
That still leaves the industry with the pesky problem of fuel prices, especially the uncertainty over diesel pricing.

The denouement there seems some way off, considering the political compulsions at the Centre, but, for sure, the bad roads seem to be ending sooner than Motown thought.