Will the auto sector revive post election outcome?

The new government will have to work on cutting the rates rapidly; giving a push to growth and also to ensure that banks and NBFCs transmit the reduction in rates to the end borrower.

May 17, 2019 09:05 IST India Infoline News Service

If one were to look at the April 2019 sales numbers for auto stocks, then most of them had reported scary numbers. The slowdown in auto has been palpable for quite some time with manufacturers shutting production temporarily and dealers complaining of a surfeit of inventory. Look at the chart below highlighting the negative growth in sales of leading auto companies in the month of April 2019.

Data Source: AIMA
 
As can be seen from the above chart, four wheelers have been under pressure arising from weak market demand and too much dealer inventory. Can this situation improve post the elections?
 
Can auto demand revive post the elections?

The revival of auto demand post the elections will largely predicate on the following conditions being met.
  • A big thrust to rural demand would be the key. In the last one year, there have been attempts like giving better MSP for farmers and investing in rural infrastructure. Apparently, this has not resulted in robust demand for any of the consumer products as evidenced by the latest FMCG numbers too. Whether projects like PM-Kisan and NYAY can really bridge this gap is something that really needs to be seen. But what could really boost auto demand is a clear movement towards doubling of farmer incomes by 2022. That could be a big boost to auto demand.
  • The latest consumer survey conducted by Credit Suisse, has clearly pointed out to a doubling of the propensity to postpone purchases. That is not a good sign as it indicates that immediate revival in demand may be hard to come by. Such situations can only improve when the overall consumer confidence improves and that will largely depend on what the new government does about jobs and income levels. Spreading income level benefits make a lot more sense for auto demand.
  • Cost of funding for cars will be a key issue for demand off take. In the last year, the cost of funding has gone up and funding has also become tighter. The cost of funding has also gone up for NBFCs and liquidity constraints mean that they do not have the capacity to create credit. That will require confidence building measures that go well beyond just providing adequate liquidity. The new government will have to work on cutting the rates rapidly; giving a push to growth and also to ensure that banks and NBFCs transmit the reduction in rates to the end borrower. That will be the key to revival of auto demand.
  • The cost of fuel has been one of the key factors impacting the demand for cars. It has been seen even in the past that the median Indian consumer is extremely cost conscious and tends to reduce usage quite rapidly if the maintenance costs go beyond a point. In the previous year when the crude prices went above $85/bbl, petrol prices had crossed the Rs92/litre mark and were even threatening to go towards Rs100/litre. That is not a comforting thought for the Indian consumers. One of the first things that the government must do is to give people some comfort on the range in fuel prices. Let us not forget that Indian fuel prices are among the highest in the world and all this is happening at a time when the Brent prices are nearly 40% below the levels in 2014. Free pricing of fuel is not a very exciting proposition for auto demand.
  • The used car market needs to be robust to sustain demand for new cars. In the last two years, demonetization was a big blow to the used car market since most of the transactions in this market happen on cash basis. A robust used car market not only creates better realizable value but reduces the cost of holding for most users. Indirectly, it also improves the demand for automobiles. One of the first priorities will be to ensure that the liquidity taps are made easily available to the players in this market.

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