Light at the end of tunnel for sluggish auto sector

Sachchidanand Shukla

Recent data released by the Society of Automobile Manufacturers (SIAM) offers a ray of hope to the beleaguered automobile industry. Most of the categories have shown an improvement in sales and production figures.

Lately, the going has been quite tough the world over for the automobile sector. Manufacturing margins have been going downhill while development costs have been rising by the day.

Besides, sluggish demand and excess capacity have further exacerbated the situation in this sector.

In addition, recall of vehicles owing to safety concerns by certain manufacturers have compounded the problems. The predicament of Ford Motors is a case in point. It was one of the most profitable and well-managed companies a year ago. But poor product launches, falling productivity and, above all, safety concerns over its best selling sports utility vehicle Explorer and the $3 billion recall of around 13 million faulty Firestone tyres did it in.

On the other hand, the domestic automobile industry has been struggling due to a host of reasons. There was an upward pressure on prices due to the rise in sales tax owing to a tax rationalising drive by certain states.

Revised emission norms have further led to a rise in costs. Piling up of inventory due to sluggish demand, too, are affecting the toplines and bottomlines of auto companies. And, not surprisingly, there has been a derating of all major auto stocks.

In fact, a look at the price-to-book value ratio of all the major players in the industry across all segments shows that except for Hero Honda Motors in the two-wheeler segment and Punjab Tractors and Swaraj Mazda in the tractor and HCV/LCV (heavy commercial vehicle, light commercial vehicle) segment, respectively, all the companies are trading below their book values.

However, on the positive side, the slowdown has resulted in cost-cutting and boosting of operational efficiencies. Many of the companies, like Hero Honda and TVS Suzuki have gone into outsourcing of components instead of in-house manufacturing.

Also, some players went into an overdrive by launching a slew of models, especially in the two-wheeler and the car segment.

Product segmentation and launches across segments hold the key to market share in the industry, according to SIAM. These steps would help the margins and ensure a decent return on investment in the near future.

Normal monsoons and an improvement in the agriculture sector is expected to perk up demand from the rural sector. A rise in replacement demand besides enhanced infrastructure spending too could act as a catalyst. Though, a few measures to help revive the segment, such as a cut in excise duty on two- wheelers and cars has not yielded any result so far, it is expected to provide a fillip to the industry in the coming months.