Slippery path: Car sales have de-grown in 4 out of last 5 months

We are not bearers of optimism and good news. Our analysis of the domestic passenger vehicle (PV) industry (read PV ex-vans as van use is largely commercial) leads us to believe we are likely witnessing the start of a significant slowdown (4 out of last 5 months, PVs have de-grown) as incremental demand (ID) has slipped to 38-month-low (akin to FY13-14 when industry de-grew for 16 straight months out of 17).

The sharp rolling ID decline signals that utility vehicles (UV) could lead to further slip of PV ID growth as UV share of industry ID has risen 60% till YTD’18. Growth rates of top-8 states, which account for 60% of demand, have slipped in the negative territory for both industry and Maruti Suzuki (MSIL) in Q2FY19 for the first time in 18 quarters and are likely to remain negative in Q3FY19. Consumer insights also suggest weakness based on RBI consumer confidence on discretionary spends and interest in “car” searches via Google Trends.

Dissection of demand trends

Amidst a challenging macro, demand scenario has remained weak even after festive season. Our deep dive analysis suggests the recent reduction in ID is more akin to FY13-14 which could prove to be a bigger concern than envisaged. On a top-down basis, (i) rolling incremental demand addition for PVs at 13k units in Nov’18 is slowest in 38 months (down 34% y-o-y), (ii) UV rolling ID is down sharply to ~6.6k units (slowest since launch of Vitara Brezza in Mar’16, down 47% y-o-y) in Nov’18, (iii) state-wise data suggests growth rate of top-8 states for both industry and market leader MSIL is negative, while rest of the country (ROC) which was the growth engine in recent times also witnessed growth slump to 3% y-o-y in Q2FY19.

Key trends on model-wise basis

Our analysis of model-wise data brings forth a few interesting points: (i) volumes of key new products (launched in last 12 months) are failing to surpass initial launch push volumes, reflecting weak consumer sentiment (only 1 out of 5 key models growing). Note that 3 out of these 5 key models are from market leader MSIL, (ii) OEMs preparing massive SUV onslaught (possibly 16 out of 18 new product launches in FY20 to be in SUV category) in the reasonable growth UV segment; (iii) discounts galore (8 out of top 10 cars sold in Nov’18 running at historic high discounts) as inventory remains elevated.

Our view

We turn cautious on the PV side and believe the segment is entering a low single-digit growth period. We believe key indicators like macros, rolling ID, top-8 states’ weakness, weak consumer sentiment, and discounts currently do not provide any reason to turn optimistic. We will wait for data to improve before jumping onto the “hope bandwagon”.