For the last four years, the Indian automobile industry registered an annual growth of over 15%, but now rising input costs, high interest rates and a squeeze on liquidity have thrown a spanner in Motown?s growth drive.
For the first time since 2005, sales growth of cars slipped into negative terrain as it dropped by 1.71% to 87,724 cars this July, down from 89,250 cars in the same month last year. In fact, as many as 7 of the 13 major carmakers in India posted negative sales in July this year. The big losers were Tata Motors, India?s third largest car maker, whose sales dropped 9%, Honda Siel Cars India, the fourth-largest carmaker?s sales dipped 7% and market leader Maruti Suzuki India just managed to post a miniscule 1.5% increase in sales.
The negative sales growth is a dampener at a time when the industry had set up a target to triple its annual sales to 3 million vehicles by 2016. Though the monsoon is generally a lean period for automobile sales, the current slowdown is less seasonal and is likely to continue until the end of this year.
The slowdown was evident in the quarter ending June results. Tata Motors reported a 30% decline in net profit as compared to the same quarter last year. This is the company?s worst quarter in the last six years. Similarly, Mahindra & Mahindra reported a 17% decline in net profit in the same period as compared to the same quarter last year and Maruti Suzuki?s net profit was down by 7% in the same period.
The steep rise in input costs has put all automobile manufacturers in a quagmire. The price of alloy steel has gone up by about 10% during the quarter and the prices of other key inputs like copper, aluminium and rubber have also increased by about 15-20%. Further, the government hiked excise duty by Rs 15,000 on cars with engines between 1500 cc and 1999 cc and Rs 20,000 on cars with engines more than 2000 cc. Thus, to tide over the rise in input costs, all automobile manufacturers have raised their prices in the range of Rs 6,000 to Rs 30,000 across models.
Declining profit margins and credit squeeze will stall capacity expansion plans of most auto companies and the next quarter will be even more challenging for the industry. The situation will become sticky for those companies who don?t have much overseas demand to act as a buffer.
Moreover, in the automobile industry, capacity expansion happens in blocks and with the slowdown likely to persist for sometime, there will be large cuts in planned capacity expansion. And with car inventories (stock of cars at warehouse) piling up, companies are now cutting down on production and even shutting down some plants citing regular maintenance reasons.
Initially, companies were offering huge discounts to rake up sales, but now have reduced discounts fearing a big hit on their bottom lines and auto financiers admit the squeeze will make life difficult both for the consumer and the vehicle seller. Since 80% of India?s passenger vehicles and over 60% of two wheelers are financed by banks and financers and banks maintaining a tight credit disbursement, the big issue will be availability of credit, as delinquency fears make financiers more cautious. In fact, large-scale car loan defaults are already being reported in some high selling states like Uttar Pradesh and Rajasthan and Maharashtra.
The slowdown will also wane confidence of foreign companies setting up greenfield projects in India. Japanese major Toyota is building its second factory outside Mysore and the first vehicles will roll out next year and Nissan is building its factory in Chennai to commence production from 2010.
Now, all hope for a revival in sales growth hinges on the festive season beginning October and launch of new models like the much awaited Tata Motor?s Nano, Hyundai Motor?s i20 and Maruti Suzuki?s A Star. But given the weak sentiment which is likely to prevail for some more months, car-makers may delay launches till the time interest rates start softening.
saikat.neogi@expressindia.com