Slippery slope: Car sales drying up despite heavy discounts

Updated: Jun 27, 2019 6:57 AM

Despite dealers offering discounts from anywhere between 2% and 10%, sales remain in the slow lane

automobile sector, automobile industryAnalysts say the credit crunch in the financial services sector could continue to impact auto loans since 80% of car purchases are made via loans.

By Pritish Raj

The year to June will be the first ever in which car sales would have fallen in virtually every single month.

Despite dealers offering discounts from anywhere between 2% and 10%, sales remain in the slow lane, leaving inventories at major car makers at levels higher than the usual 20-30 days.

Companies, however, are hopeful that things will look up soon. “With the RBI easing interest rates, I hope the banks will pass on the benefits to customers in the next few months. That may help push sales,” Maruti Suzuki chairman RC Bhargava told FE. Bhargava said loans had become more expensive since July last year due to higher interest rates and that had held back customers.

Analysts say the credit crunch in the financial services sector could continue to impact auto loans since 80% of car purchases are made via loans. “Volumes will likely be subdued in the near term due to selective financing by NBFCs, an increase in vehicle prices on account of BS-VI norms and weak consumer sentiment. FY20 could be a challenging year for the sector due to transition to BS-VI norms from April 1, 2020,” analysts at Kotak Institutional Equities said.

The discount on the popular Grand i10 and Xcent has now gone up to as much as Rs 60,000 from around Rs 35,000-40,000 in January, an analysis by Axis Capital shows. The Santro can now be bought at a discount of Rs 12,500. Puneet Anand, senior GM, Hyundai India, conceded the sentiment was low and that it could take a while for demand to pick up. “Post-August, there will be a change in the market scenario because in the next two to three months, the financial services sector is likely to see some improvement and the Budget will also boost sentiment,” Anand said.

Discounts on Tata Tiago, dealers say, have gone up to nearly Rs 35,000 from Rs 6,000 at the start of 2019. Other models from the Tata Motors stable such as Tigor, Nexon and Hexa have also seen a rise in discounts in the range of Rs 10,000- 25,000 in June over January.

The discounts on Mahindra & Mahindra cars such as the Scorpio and the XUV500 have gone up to around Rs 35,000 and Rs 38,000, respectively. At the start of the year, the discounts on these two models were around Rs 22,000 and Rs 27,000, respectively.

Other models like the KUV100 and the Marazzo are being sold at steeper discounts currently. “For Hyundai, discounts have risen steadily in the last six months, by up to 200 basis points while at Tata Motors and Mahindra & Mahindra, they have increased by 180 bps and 100 bps, respectively, over the same period,” analysts at Axis Capital said.

The discounts on Maruti Suzuki’s models have remained more or less the same since January, except for the Alto800 model, on which discount went up to Rs 25,000 in June against Rs Rs 14,000 in January. In fact, the company cut discounts on several models like the Alto K10, Celerio, Swift and Dzire, as it was looking to bolster its margins. In April, FE had reported that the sops were gradually being lowered every month after January and will further fall by August-September.

Also read: Why online brands are going offline to tap fast-growing used car market

Passenger vehicle sales have been slowing since July 2018, firstly on account of Kerela floods and subsequently, due to hike in insurance premiums from September 2018. Thereafter, the default by IL&FS and group firms led to a crunch in the NBFC space and banks, too, became cautious about giving loans. As a result, interest rates went up and the demand for cars dipped, leading to increase in inventory levels at the dealers. Although, most manufacturers have been cutting production since January, inventory is still higher than normal, prompting companies to offer hefty discounts.

VG Ramakrishnan, MD & managing partner at Avanteum Advisors LLP, said the discounts are likely to increase going forward and even if they don’t, the price differential between a BS-IV and a BS-VI model will compel the consumers to go for the cheaper variant. “The NBFC sector is in a mess right now and it may take another two to three months for the situation to improve and car sales to pick up,” Ramakrishnan said.

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