Output cut signs flash on auto avenue

Dec 19 2012, 01:06 IST
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SummaryAs inventories touch 6 weeks, companies are dishing out discounts to push sales.

Auto manufacturers may have to effect production cuts in January-February if vehicle stocks at dealers are not cleared by the end of this month. Companies manufacturing petrol cars, two-wheelers and medium and heavy commercial (M&HCV) vehicles are trying to clear inventories before New Year by offering discounts.

Analysts, however, say stock levels are not alarming yet. They attribute the inventory spike to sub-par festive sales in November, when volumes rose a mere 1.79% to 1.5 million units. Besides, December is dull on sales as buyers wait until New Year.

In the M&HCV segment where R2-3 lakh discounts are on offer, inventory levels are now at about six weeks. According to dealers and analysts, this is less worrying than eight-week stocks during July-August. In fact, sales through the fiscal have been sluggish as slowing economic growth, rising fuel prices and high interest rates depressed sentiment.

A Tata Motors dealer said that though companies are compensating dealers, discounting has eroded margins, even as warehousing costs (insurance, rent and interest on loans) have doubled. “Discounts are more than dealer margins; so it's supported by the manufacturer. The schemes are being offered to clear stocks and compete with new players such as AMW and Bharat-Benz. The dealer margin has shrunk from R50,000 to R10,000, and that’s pinching us,” he said.

In a good month, Tata Motors sells about 18,000 units of M&HCVs and Ashok Leyland 7,000 units.

These volumes are now down to about 12,000 and 4,000 units respectively. “Our inventory is in order. The discounts are there because of the sluggish market,” A Tata Motors spokesperson said.

During April-November, M&HCV sales fell 16% to 1.78 lakh units, with November figures alone falling 33% 17,441 units. “We expect a cyclical upturn by the second half of 2013-14 accompanied by lower interest rates,” a Deutsche Bank analyst said.

Industry leaders Tata Motors and Ashok Leyland, who together command 80% of the 3.4-lakh unit domestic M&HCV market, reduced output through the year. “We have done block closures of 2-3 days from time to time at our plants to reduce inventory build-up in commercial vehicles,” the Tata Motors spokesperson added. A supplier industry source said Ashok Leyland too has reduced output at its Pantnagar factory.

Analysts feel M&HCV makers may have to go for further cuts in January if the market continues to be sluggish. A Barclays report after Tata Motors and Ashok Leyland's announced their Q2 results said a marginal improvement in Q3

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