Sales may pick up after Diwali and passenger vehicles may take six months for turnaround
The second quarter of the fiscal is expected to be the worst quarter for the auto industry after dismal sales data published last month, followed by inventory pile-up and increase in non-working days for auto manufacturers.
The festival season is unlikely to result in any improvement is demand for the auto sector, feel experts.
According to A K Prabhakar, there has been no pick up in festive demand before Ganeshotsav and Onam, and there is unlikely to be any such pick-up for the upcoming festive season as well.
WHAT'S THE HITCH?
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- The new Motor Vehicle Act
- High GST
- Push for electric vehicles
- Transition from BS IV to BS VI
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"There is no pick-up in demand yet, but post-Diwali we expect pick-up to happen. For passenger vehicles, it may take at least six months to turn around, while commercial vehicle normally take three years to show a turnaround when there is an economic slowdown," Prabhakar said.
He said the recent government policies related to the Motor Vehicle Act, high GST, push for EVs and transition from BS IV to BS VI have confused consumers, thereby impacting sales.
"There are too many headwinds for the auto sector. Once the government address these issues, things should improve and demand should come back," he said.
The second quarter earnings numbers, according to him, would be poor, as sales would be moderate with weak margins.
"Discounts have increased during this quarter, there is inventory pile-up and manufacturers are producing in a staggered manner to avoid further piling up on inventory. Production shutdowns have also increased at the plants. The second quarter is going to be a worst quarter for the sector," he further said.
The downtrend in the auto sector intensified last month due to weak retail sales on account of economic downturn, and inventory correction. A number of dealers have either shut shop or laid off employees. Monsoon combined with flood across several parts of the country along with customers deferring the purchase of vehicles due to upcoming festival season have dampened the sales.
Auto sales fell 31.57% in August, the worst month in 22 years. The passenger vehicle segment declined in August by 36% yoy. Inventory correction through production cuts continued during the month. The commercial vehicle segment declined by 41% yoy due to poor freight availability and lower freight rates which continued to hamper the demand. The two-wheeler segment declined by 17% yoy, while the 3W segment has also contracted by 9% yoy due to headwinds across key international markets and subdued domestic demand.
In a recent report by Motilal Oswal Financial Services, it said that the feedback on pre-festive demand is not encouraging as inquiries remain tepid, partly impacted by floods in several parts of the country and demand deferment in anticipation of some sops from the government. Most original equipment manufacturers (OEMs) continued cutting inventory through production cuts in August.
"Auto sector is trading at a P/E of 17.4X in line with the historical average of 17.4x. P/E multiples continue witnessing de-rating due to weak volumes and the increasing risk of EVs. Weak volumes across segments resulted in higher inventory levels, despite production cuts. In August, volumes for 2Ws/PVs/CVs declined by 17.5% /34.3% /44.5% y-o-y," the report said.
LKP Securities in an auto roundup note said, "A good monsoon, encouraging festive season, softening fuel prices may lift up the sector. Despite these factors, at least the month of August has not seen any growth. With BS VI implementation deadline coming closer, the industry may face challenges, while at the same time pre-buying will result in some demand, but not as expected earlier. With metro cities facing demand crunch and rural distress at the forefront, we believe the first half of fiscal 2020 to remain subdued."
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"There is no pick-up in demand yet, but post-Diwali we expect pick-up to happen. For passenger vehicles, it may take at least six months to turn around, while commercial vehicle normally take three years to show a turnaround when there is an economic slowdown," Prabhakar said.)
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