Another fell blow lands on automakers

The double whammy of a steep hike in petrol prices and a 25 basis point increase in interest rates couldn’t have come at a worse time for car makers.

Already, domestic passenger car sales have shown a year-on-year degrowth for the last two months — of almost 16% in July and another 10% in August — and the latest policy salvos threaten to derail even the festive cheer.

Had the fuel prices and interest rates not risen in unison, the auspicious period of Navratras beginning on September 28 would have brought back some cheer to the market.

Maruti Suzuki India, the country’s largest car maker, is already suffering from production cuts due to the ongoing labour strife and the twin price hikes would only make matters worse. Its chief financial officer Ajay Seth told DNA that these hikes “would dampen buying sentiment...demand was anyway slowing down”.

He also indicated that with petrol getting even more expensive, consumers are expected to turn towards diesel in a big way.

To a question on whether discounts would now go up further to boost purchases, Seth said that discounts do tend to rise when demand is slow but they have to be seen in a “month to month context”.

How will Maruti tackle these negative stimuli?
Seth advocated a three pronged approach: not to lose focus on market share, intensify cost and productivity focus, and examine efficiencies of the supply chain. Now, whether Maruti will be able to cash in on the festival demand rush remains to be seen but analysts are not hopeful.

Hitesh Goel at Kotak Institutional Equities said, “If the strike issue is not resolved immediately, Maruti may not be able to capitalise on the festival season in October-November. We forecast Maruti volumes to decline by 8% year on year in fiscal 2012 as we expect demand to get deferred till the first quarter of fiscal 2013 versus earlier expectations of a pick-up in the festive season”.

Toyota Kirloskar Motors’ deputy MD Sandeep Singh echoed Seth’s thoughts, saying, “The price hike has come at a wrong time — the festive season. Also, this is the third substantial hike in petrol price this year. This will further increase the gap between the petrol and diesel prices and polarise the market towards diesel. This is not healthy for the growth of the industry.”

Toyota has seen its latest launches - Etios sedan and Liva hatchback - fly off the shelves these last few months when most other car makers have reported dwindling sales. Diesel accounts for a bulk of the sales of both models.

Tata Motors, which is already facing stagnating sales of the Nano and a decline in most of its other passenger car sales, also admitted that the fuel price hike will impact demand “leading to resistance among consumers. “But consumers will now opt for best fuel efficient models available in the market,” a spokesperson said. Vineet Hetamasaria, head of Research at PINC Research said that with widening gap between petrol and diesel prices, demand for diesel cars will rise.

“However, most of the companies, except Tata Motors, do not have enough capacity to serve the demand for diesel vehicles.” He also expects discounts on petrol cars to remain high.

General Motors, which has recently launched the Beat diesel and would have expected demand to rise, says that normally incremental sales growth of about 20% is seen during the festival season.

“This year too we expected the industry to show some improvement during festivities. But with constant hike in petrol prices, market during the season will remain subdued,” P Balendran, vice-president and director (corporate affairs), GM India, said.