Automobile makers cut inventory as sales recovery seems elusive: Analysts

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August 31, 2019 3:57 AM

An analyst with Motilal Oswal Securities said, “It seems the recovery is elusive and the inventory correction continues to be undertaken by the OEMs. Our interaction with leading PV/2W/CV channel partners still indicates no signs of demand recovery at retail levels, as inquiries to sales remains tepid.”

automobile industry, OEM, BS-VI, Motilal Oswal, Bajaj Auto, CV retails,  CV wholesalesPV demand trend remained weak across major markets with enquiries to sales conversion even weaker for existing models.

The automobile industry continues to reel under pressure with no signs of recovery at retail levels. With enquiries to purchase conversion ratio remaining weak, the auto makers have decided to reduce their inventory both at factory as well retail levels through production cuts. The customers’ mind is confused by various policies and issues which have happened, and to top it off, compliance of BS-VI and its impact on residual values, said analysts.

Based on the interactions with leading OEMs (original equipment manufacturers) of passenger vehicles, two-wheelers and commerical vehicles in the last few days, the analysts opined that the ensuing festive season may help a little bit to tide over the ongoing slowdown blues but sales are likely to remain in the declining mode.

An analyst with Motilal Oswal Securities said, “It seems the recovery is elusive and the inventory correction continues to be undertaken by the OEMs. Our interaction with leading PV/2W/CV channel partners still indicates no signs of demand recovery at retail levels, as inquiries to sales remains tepid.”

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Feedback on pre-festive demand is not encouraging, partly impacted by floods in several parts of the country and demand deferment in anticipation of some sops from the government. Most OEMs opted for production cuts in Augst this year, the analyst pointed out.

“Our recent interactions with leading entire spectrum of channel partners in key markets of Delhi, Maharashtra, Kerala and Rajasthan indicate no sign of demand recovery as enquiries to conversion continue to remain weak YoY. However, with onset of key September festivals like Ganesh Chaturthi in Maharashtra and Onam in Kerala, there has been an increase of 5% in retail sales (especially in PV and 2W segments) while CV sales continue to remain weak,” said an analyst with Prabhudas Lilladher.

On the PV side, there is an excitement around new product launch enquiries. PV demand trend remained weak across major markets with enquiries to sales conversion even weaker for existing models. However, recent new product launches like Venue, Seltos, Hector and XL6 helped to bring footfalls in the showrooms. The average inventory levels for most PV players remained at 25-40 days.

The Motilal Oswal analyst said that despite production cuts, inventory remains high due to weak demand. “We expect Bajaj Auto’s wholesales to decline by 9% YoY in August (14% decline for domestic 2W volumes). TVS Motor’s volumes are estimated to decline by 11% YoY, whereas HMCL’s wholesales are estimated to fall by 25% YoY in the month. Royal Enfield’s dispatches are expected to decline by 21% YoY to 55,000 units,” he added.

According to Prabhudas Lilladher analyst, the inventory of two-wheelers is still high despite continuous inventory correction. While demand continues to remain weak in major markets, we note 5% volume recovery in rural pockets of Maharashtra. However, in tier 2 cities like Pune there is still no sign of demand recovery even for Ganesh festival yet, as volumes are down 15% YoY (festive to festive) so-far. We note marginal decline in 2W inventory levels at 50 days v/s 55 days earlier..

ICICI Securities, which recently held meetings with number of OEMs, in its analysis said, it could see the changing dynamics of consumer preferences across automotive space. Customers’ mind is confused by various policies and issues which have happened and to top it off BS-VI and its impact on residual values. EV is still far, and the government should clarify that EV is not necessarily urgently looked into.

Right communication from the government is much needed to translate into improved sentiment viz. scrappage policy decision. Dealer enquiries have remained largely stable in recent months. However, money is unavailable for upfront payment or EMIs both from financing side and lower incomes, the market analyst pointed out.

Motilal Oswal analyst further said that CV retails too remain weak across regions as demand from all major end-user segments remains tepid, resulting in a further increase in average discounts. “We expect CV wholesales for ALL to decline by 36% YoY (50% decline for M&HCVs) and for TTMT to decline by 42% YoY due to continued inventory correction,” it added.

ICICI Securities analysis said that ndividual financial capacity has not reduced, however, earning confidence and visibility has reduced and hence, the delay in purchase decisions. In India, savings rate of consumers and disposable income has come down. Two-wheeler sales have also declined and so, rural customers might have also seen a decline in income due to previous weak monsoons.

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