Monday, September 10, 2012

>AUTOMOBILE SECTOR: Declining trajectory

The change in macro economic variables (Inflation, Interest Rate, GDP, IIP, Household savings) over the past year has altered the dynamics of the automobile industry with the broader segments growing at a slower pace and selective segments showing higher growth. FY09 was a year, which impacted the automobile industry. The Commercial Vehicle Industry was impacted to a far greater extent as compared to the Passenger Car or Two wheeler industry. In order to boost consumption ‘then’, the Government had given stimulus in the form of lower excise duties and wage increases through MGNREGA scheme , which propelled demand.

The current cycle is different from 2009 as it’s associated to sticky inflation, lower household savings, high interest rates and thus slowing growth. This is apparent from lower GDP & IIP numbers, which are a proxy for Commercial Vehicle growth. The current slowdown started with passive passenger car offtake, which then led to lacklustre performance of the CV segment and now is also being reflected among the two – wheeler industry. 2W Industry is taken to be a barometer for rural demand, therefore the plunge in the same reflects signs of lower GDP growth spreading to rural consumption. Tractor sales have also been on a declining trend and deficient rainfall among the highest selling states – Punjab, Andhra Pradesh & Haryana accentuated the same.

In our view the rapid growth of 2010 and 2011 has overstated a portion of future consumption. We would need a series of rate cuts to propel long-term demand, but that also would show the poor state of the economy. As of now, SBI has cut lending rate despite the fact that RBI has not cut repo rate. We can see many such events happening in the future.

CV - Lower availability of cargo from SME’s, lower arrival of fruits and vegetables from Agricultural Produce Market Committee has resulted in truckers reporting 10% - 15% drop in trips on major truck routes in Q1FY13. Simultaneously truck rentals fell by 8% - 11% in Q1FY13 as compared to a 35% jump during October 2009 – March 2012. Rising costs and drooping freight rates have taken a toll on fleet operators profitability. As trucks operate on diesel , a hike in diesel prices would further squeeze their margins. In our view, in order to see rapid expansion of CV’s we would have to see rapid expansion in freight availability, else tonnage growth of the last few years would imply surplus capacity in the system.

2W – Rural spending was higher than urban consumption in the 2 years upto 2012, which led to high 2w growth. But this was devoid of reforms on the fiscal front, which is hitting future rural income growth.

Cars - This segment has been a clear victim of higher fuel prices and higher interest rates as 70% of car population runs on petrol and is financed. Selective pockets have seen growth on account of new launches and price divergence between petrol and diesel prices. In our view, future growth would be a function of rise in per capita income and better fuel economy.

The most sustainable way to solve these problems should come from industry upgrades, company cost rationalization, technological development, innovation and associated government regulations and policies.

To read report in detail: AUTOMOBILE SECTOR