For six months in a row now, auto sales have remained buoyant on the back of a strong economic recovery, new product launches, easy availability of finance and pre-buying on the strong possibility of increase in price because of change of emission norms to
BS-IV in 11 cities and BS-III in other parts of the country from October this year. Market leader Maruti Suzuki reported its highest ever monthly sales at 1,02,175 units in May, registering a 28% jump from the same month last year. Similarly, the country?s second largest carmaker, Hyundai Motor India reported an increase of 15.52% in domestic sales for May. Interestingly, the 50-basis-point increase in the lending rate for auto loans by most banks has not dampened demand for new cars. Usually, the months from April to June are associated with low sales growth and demand picks up only with the start of the festive season in September-October. But this time around the trend is different, which has made analysts project a 25% year-on-year growth in car volume and an impressive 35% growth in two-wheeler volume in the current financial year.
Over the longer period of time, the country?s low car penetration levels and favourable demographics supported by higher per capita income levels will further propel car sales. The continued volume growth will give the industry the much-needed pricing power and support high operating leverage. Most auto companies have undertaken cost reduction and productivity improvement initiatives, which, to some extent, will dilute the impact of rising raw material cost and support higher margins. Increase in raw material costs in the last few months, which have now started dropping after the European debt crisis, and the cost of upgrading engines to adhere to new emission norms would be partly taken care of by the 1% to 1.5% hike in prices earlier and higher operating leverage. Going ahead, auto companies may face some headwinds because of hardening of interest rates, but going by the pent-up demand, the Street has factored in the likely rise in interest rate and auto stocks have outperformed the benchmark Sensex in the last one year. Most of the foreign majors are looking at the Indian market, especially in the small car segment, which will see the maximum growth. With the inauguration of Tata Motor?s Nano manufacturing facility at Sanand in Gujarat on Wednesday, two years after it was forced to shift the plant out of West Bengal over a land row, the company will now be able roll out 2.5 lakh units annually and subsequently increase to 5 lakh units per year. This will further drive volume growth in a price-sensitive Indian automobile market.