Bumpy ride ahead for auto companies

G Balachandar Chennai | Updated on March 19, 2019 Published on March 19, 2019

Maruti’s decision to cut production by 26 per cent to just 1,26,000 units in March this year compared to 1,72,000 units in March 2018 signalled the prevailing market conditions   -  Kamal Narang

Drying up of auto loans exerts pressure, no sign of pick-up in March sales

The continuing sluggishness in vehicle sales and uncertainty over the near term growth are causes of concern for all stakeholders in the auto sector , said industry analysts and representatives.

After a poor third quarter, the auto industry was hoping that sales would pick up with easing of liquidity constraints and new product launches, among others. Also, sales normally get a boost during March. But this time, Q4 is also proving to be a challenging one to the industry.

Top car-maker Maruti’s decision to cut production by 26 per cent to just 1,26,000 units in March this year compared to 172,000 units in March 2018 signalled the prevailing market conditions.

“This clearly shows that vehicle manufacturers are concerned about monthly sales during the next three months, from April to June 2019. Additionally, dealers are left with large volumes of unsold stock since the last six months, which, in turn, is putting pressure on their profitability and liquidity,” said Kaushik Madhavan, Vice-President, Mobility Practice, Frost & Sullivan.

Inventory pile-up

Echoing his views Amarjeet Maurya, Associate Vice President, Angel Broking, pointed out that Maruti’s announcement was a clear admission of the demand pressures that auto companies have been facing in the last few months. “In fact, ever since the liquidity squeeze that manifested in October last year, the demand for consumer automobiles has been under consistent pressure,” he added.

Dealers are now pushing back on accepting fresh stock from vehicle manufacturers, forcing them to balance volumes by rationalising production.

“Inventory management and liquidation are expected to be primary goals for dealers across passenger vehicles and two-wheelers in India over the next 2-3 months,” said Madhavan.

Over the last few months, auto companies have seen a pile-up of inventories and Maruti will be spending its efforts to clear the inventory backlog in the month of March.

Liquidity crunch

NBFCs (Non-Banking Finance Companies) faced a severe liquidity crunch post-IL&FS default. The drying up of financing and higher cost have also been instrumental in compressing demand. A rise in interest rates is one of the key reasons for the slowdown in car and truck sales.

“If you compare the liquidity situation with Q3, things have eased this quarter. But it is not like pre-September level, liquidity continues to be little tight,” said V Lakshmi Narasimhan, Executive Director, Shriram City Union Finance, a top private player in two-wheeler loans.

NBFCs have been the biggest lenders to the auto sector. NBFCs accounted for more than 76 per cent of incremental auto loans in FY18. They have applied brakes on disbursements in the recent months in a bid to enhance their balance sheet liquidity.

In February this year, cars, light and medium duty trucks, bikes and scooters reported a decline in their sales and March is also not on expected lines so far.

As NBFCs are holding back, credit growth in segments such as auto loans is likely to be at a moderate level. Hence, vehicle sales are expected to be under pressure in the near term.

Published on March 19, 2019
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