Car sales skid in March: Dealers report 5-15% drop in sales so far

Sindhu Bhattacharya & Rabin Ghosh

NEW DELHI/MUMBAI:

• The monthly repayment instalment (EMI) for a Tata Indica Xeta on a three-year loan from ICICI Bank has increased by about Rs 91. This makes the incremental cost over three years Rs 3,276 for every Rs 1 lakh of loan. For a five-year loan on the same car from the same bank, the total incremental cost works out to Rs 6,780 per lakh.
• For a Maruti 800, the incremental cost to the consumer comes to about Rs 150 per lakh per year, which means Rs 9,000 for a five-year loan.

With car loan rates moving steadily north, manufacturers as well as dealers are a worried lot. Over the last two months, car loan rates have seen a rise of 250 basis points (2.5%) to touch the 14.5-16% range. So while February showed good sales growth across the board for car brands, the March numbers may not be able to maintain the tempo.

DNA Money spoke to a cross-section of dealers in Delhi and Mumbai and it was the same story almost everywhere: sales so far in March are down anywhere from 5-15% from last year. The ongoing Navratra season - typically considered auspicious for buying cars - may end up as the only saving grace.

Officials at two prominent Maruti dealerships in Delhi say that sales in March till now have declined by 10%. They see no upside seen in the immediate future. A dealer for Tata Motors put the decline at 15% this month.

In Mumbai, too, dealers are worried over the sales slump. Said a dealer in luxury cars:  “March demand has been low and we would be lucky to match last month’s sales figures. The first 10 days of the month were really bad; a pick-up has begun only now”.

On the face of it, passenger car sales have not seen any decline and, according to data released by the Society of Indian Automobile Manufacturers (SIAM), the car sales graph has climbed consistently through most of the current fiscal year to log almost 25% cumulative growth during April-February, 2006-07 compared to the corresponding period of the previous year. Total sales (including exports) was up 22.7% to 11,37,199 units against 9,26,359 in the same period in 2005-06.

However, March could mark a turning point, with the momentum slowing. The managing director of a leading car company told DNA Money that the market was giving out mixed signals and a clearer picture would emerge only after the March sales numbers were out. He was implying that the high double-digit growth numbers logged till now may not be sustained in March and beyond.

General Motors India’s vice-president, marketing & sales, Ankush Arora, had a slightly different take on this. “Growth rates have been very buoyant at around 13% even in the first three months of this calendar year. But sales could have grown at an even faster rate had interest rates not hardened over the last couple of months. The hardening typically shows an impact after some lag, so we need to watch out for the next few months”.

Rajiv Sabharwal, head of retail assets at ICICI Bank, observes that many customers go for a cash-down option when interest rates climb a bit too high. “I won’t say interest rates have not had an impact on the vehicle financing market. But what happens in such circumstances is that the percentage of cash-down buyers increases.”

Till two years back, only 12-13% of car buyers were buying their dream machines with cash. Now, says Sabharwal, as many as 20% of all buyers prefer to buy new four-wheelers by paying cash instead of opting for a loan.

Shammii Singh, managing director of Nummer Eins Motors, a Skoda dealer in Mumbai, agrees. “Earlier, 90% of our cars were sold on finance schemes; now about half the number is bought on upfront payment. Just today, we sold five cars on cash. For an expensive brand like ours, it is rather surprising to see people pay Rs 12-14 lakh upfront.”

An industry expert explains that higher interest rates become a serious issue for certain categories of car buyers - mainly those who are upgrading from two-wheelers to an entry-level vehicle. “If higher interest rates come at a time when the general economy is also slowing down, they immediately begin to arrest car sales,” he adds.

Yet another industry veteran points out that while car financers have raised interest rates over the last few months, car companies have been hiking purchase discounts, thereby mitigating the negative effects to a large extent.

The big question: will high double-digit growth rates disappear soon? Not quite. Industry estimates put overall car sales growth in 2007-08 at about 15%. While this is certainly much lower than the 25% growth seen this fiscal till February, sales in 2006-07 grew on a relatively smaller base. 15% is nothing to sniff at next year.

Also, with freebies and discounts on the rise, margins across the passenger car industry may come under severe pressure in the months to come. It remains to be seen whether the industry continues to plot a steep growth curve despite all the negatives.