Following a deficient monsoon in 2014, the rural economy slowed down significantly, leading to a fall in car, motorcycle and tractor sales volumes.
Following a deficient monsoon in 2014, the rural economy slowed down significantly, leading to a fall in car, motorcycle and tractor sales volumes. Unseasonal rains and hailstorms at the start of the harvesting period aggravated the crisis, weighing on the already poor performance of automobile manufacturers during the quarter ended March.
Volumes for utility and light commercial vehicles, motorcycles and tractors depend heavily on rural demand. With that being weak, manufacturers like Tata Motors, Mahindra and Mahindra and Hero MotoCorp did poorly in the last quarter.
New Delhi-based Hero MotoCorp, the country’s largest two-wheeler manufacturer, registered a meagre 4.7% rise in volumes, with the economy and executive segments — which draw volumes primarily from the rural markets — declining or staying flat. Around 55-60% of Hero’s motorcycle sales come from rural markets. Volumes in the economy segment declined while the executive segment remained flat during the year.
Consequently, net profit decreased 14% year on year to Rs 476 crore in the quarter ended March 31. However, Hero made an exceptional loss of Rs 155 crore during the last quarter, which also contributed to the fall in net profit.
A Srinivasu, head, sales and marketing, Hero MotoCorp, feels demand for motorcycles will remain subdued during the first half of the fiscal due to unseasonal rains, low yield and the resultant low spending capacity of
“We expect the second half to be better. Looking at the government spending on various projects things are likely to improve. With the good monsoon, we will see a revival in total demand in the second half,” added Srinivasu.
The fortunes of Mahindra & Mahindra – India’s largest tractor and utility vehicle (UV) manufacturer – depend entirely on rural markets. Last fiscal, the tractor market shrunk over 30%. M&M, the market leader, saw volumes in the segment fall 14%. Utility vehicle sales met the same fate with volumes in the segment falling 8% in FY15.
About 33 % of M&M’s volumes come from the rural markets. Hence, the steep 38.57% fall in net profit in the fourth quarter.
Pawan Goenka, executive director, auto and farm equipment sector, M&M, said the challenge in the last quarter was primarily on the farm side — Kharif output was 7% lower than last year and mandi prices 10-15% lower than last year’s.
“All of this has led to one of the worst declines in any quarter that we have seen in the last 32 quarters, since 2005. We do expect that some sort of leveling, but our expectation is that this quarter also the industry will decline by 10-12%,” added Goenka during a conversation with sector analysts.
Rural markets also drive significant LCV volumes, where Tata Motors is the market leader by a distance. Low demand and weak disposable income growth in rural areas have resulted in a 29% fall in volumes in the LCV segment.
The Mumbai-based company reported an operating profit after five quarters due to a recovery in HCVs,
but heavy losses in LCVs restricted further growth in operating profit. LCVs constitute 60% of Tata Motors’
total CV sales.
Analysts say a recovery in the LCV segment will boost profits at the operational level, helping lower losses at the net level.
“Rural growth would continue to be a challenge for auto companies, especially in the first half of fiscal 2016. Companies will have to accordingly focus on proper product segmentation and accordingly recalibrating production of various models,” said Ajay Srinivasan, Director Crisil Research.