Thursday December 18, 03:49 AM

Source: Indian Express Finance

Waiting for sales

By Viveat Susan Pinto
Automakers have been quick to pass the benefits of the 4% reduction in excise duty announced by the government recently as part of its Rs 35,000-crore stimulus package to revive the economy. Most players have announced steep price cuts ranging from as low as Rs 1,500-2,000 on two-wheelers to over Rs 50,000 on high-end cars, commercial vehicles etc. All of this comes in addition to the various discount schemes that players have been promoting this month. But the question is: will it revive demand in the marketplace? Sales in the auto sector have been flat for the last few months. November, in particular, was bad. According to data released by the Society of Indian Automobile Manufacturers (SIAM), sales of passenger vehicles in the domestic market fell by 23.71% last month. Commercial vehicle sales were down by half, while three-wheeler and two-wheeler sales declined by about 23.12% and 14.68% respectively. Clearly, these are not good times for the industry reeling under the impact of the economic slowdown. The scenario is no different across the world especially in the US where automakers unsuccessfully sought an estimated $14-billion-bailout-package from the government recently. Large consumption markets such as China continue to be hit on account of the pall of gloom that prevails everywhere. November was a tough period as the effects of the slowdown could be seen in overall auto sales. China saw a percentage growth of just about 7.7% last month. This is half of what it achieved in October this year. Coming back to India, the inventory buildup continues to be high on account of poor sales despite a cut in production by most manufacturers over the last few months. SIAM says players cumulatively brought down production by about 6.11% last month. In the month of October, it was double than that at 12.32%. Yet, there are no signs of easing. According to the Federation of Automotive Dealers Association (FADA), the inventory lying with distributors across the country is close to worth Rs 18,000 crore as of now. Much of this is at least a month old. Auto manufacturers are obtaining details of the inventory, says Gulshan Ahuja, secretary general, FADA. That is because the excise duty cut announced by the government does not apply to the inventory lying with the dealer. It s only on vehicles that roll out of the factory. These products then can take advantage of the lower duty regime. It s the ones that have rolled out before the duty cut that are a problem because their price tags are much more than what exists now. Dealers are clearly not happy about this. This is a problem, says P Balendran, director and vice-president, corporate affairs, General Motors India. This then implies that manufacturers will have to compensate dealers for the loss they incur on account of the excise duty cut. That s a large sum, points Jagdish Khattar, erstwhile managing director of Maruti Suzuki Ltd, who now has an independent company Carnation Auto India Ltd based in New Delhi. The inventory was purchased at a higher price to what exists now. Customers will not buy at the original price. They want the reduced price. Obviously, the manufacturer will have to bear the loss, he says. What could compound matters further for both dealers and manufacturers is the overall sales performance this month. The last month of the year is traditionally not a period of high auto sales. Prospective buyers prefer to make purchases in the new year to take advantage of the new model at hand. Says an analyst with a brokerage firm in Mumbai; There s a difference between getting a 2008 model and a 2009 model of a vehicle. Consumers prefer waiting for a few weeks to make their purchases in the new year. The resale value of the vehicle is obviously better that way. That explains why sentiment is mixed about whether demand will revive following the price reduction of commercial and passenger vehicles this month. The cost of ownership has definitely come down, says an executive with an automotive company. This point is reiterated by Pawan Goenka, president, automotive sector, Mahindra and Mahindra Ltd, It should stimulate demand to a certain extent. But this won t be more than a few percentage points despite the efforts manufacturers are putting in to clear mounting inventory. The moot point is that the availability as well as the cost of finance hasn t come down. This is the hindrance to growth and sales. Almost 80-90% of total sales in the auto sector are funded by banks and non-banking finance companies. In the case of commercial vehicles, financing is almost 95%. NBFCs play a key role here as financiers. But with banks unwilling to refinance them, fund lines to these companies have come down. The second disturbing trend is the rate of interest charged on auto loans. Though down to levels of about 10-14% from 16-17% earlier, they still continue to be reasonably high for consumers to take up. I don t find banks lending enough at rates that are affordable, points Ravi Chopra, chairman and managing director, Piaggio Vehicles Pvt Ltd. The result is that the offtake of auto loans is not good enough. By some estimates, funding in the auto sector is down to about 50-60% in the last few months. This is not a good sign, says Abhay Firodia, chairman and managing director, Force Motors Ltd. Retail credit is the heart of the matter. Rate cuts alone will not do the job. Banks have to lend to stimulate demand. Till the time credit eases, the situation is likely to be grim, say observers. By some accounts, cumulative growth in domestic sales of passenger vehicles for the current financial year is likely to be below the 10% mark. Commercial vehicles, on the other hand, are likely to register a negative growth this year. For the record, cumulative growth in commercial and passenger vehicles last year was 12.17% and 4.07% respectively.