Analysts Expect Auto Sales To Revive After Dismal Month

Automakers sold fewest vehicles in a year in December. Still, analysts remain optimistic citing falling fuel prices and the possibility of a spurt in rural demand if the government increases spending ahead of the next general election.

From India’s largest carmaker Maruti Suzuki Ltd. to No. 1 two-wheeler maker Hero MotoCorp, sales fell for auto companies in December. That followed a weak festival season as higher upfront insurance costs and rising fuel prices slowed demand for cars, motorcycles and scooters, credit crunch for non-bank lenders hurt truck sales as they finance purchases. Inventory piled up at dealerships by year-end.

• Maruti Suzuki’s small and compact car sales fell 14 percent and 4 percent, respectively, despite record discounts.
• Medium and commercial vehicle sales of Tata Motors Ltd., India's largest truckmaker, tumbled 27 percent.
• Ashok Leyland Ltd.’s truck sales declined 20 percent.
• Mahindra & Mahindra Ltd.’s tractor sales fell 2 percent.

December is usually a slow month as buyers tend to wait since new year’s registration offers a better resale value. Automakers offer discounts to exhaust existing inventory at dealer yards. That didn’t help this year.

Kotak Institutional Securities slashed its operating income forecasts for the quarter ended December and also lowered earnings estimates for the full year.

Anuj Kathuria, president, global trucks at Ashok Leyland, said a higher base last year due to pre-buying and a liquidity crunch impacted truck sales as non-bank lenders turned cautious. “We are not worried about slower growth rates for the last few months and we expect volumes to pick up in the January-March quarter.”

Fuel prices have also fallen from a record high. Inventory levels have also started to fall at dealerships.

“Sales picked up in the last two weeks of December,” Ashish Kale, president of Federation of Automobile Dealers Associations, told BloombergQuint. “Positive sentiment is returning and that should hopefully aid sales in January and February. As of now the inventory levels have come down from the highs at start of December.”

Analysts agree.

The situation will improve in the fourth quarter ending March, according to Nomura. Improving liquidity and lower fuel prices will help, according Kapil Singh, auto analyst at the brokerage, wrote in a note. Any government action to support rural economy ahead of the general election could improve rural demand further, he said.

Prime Minister Narendra Modi’s government is planning a monthly income support for farmers, Bloomberg reported citing unnamed people. The possibility of a cash handout comes after Modi’s Bharatiya Janata Party lost three key states of Rajasthan, Madhya Pradesh and Chhattisgarh. The common theme during the election campaign was farm distress and the Congress made good on its promise to waive farm loans after coming to power.

Pardoning farm loans and tractor sales show limited correlation, HSBC said. But waivers along with other rural-driven schemes have historically lifted rural household financial conditions and auto sales, Yogesh Aggarwal, analyst at HSBC, wrote in a note. “We expect the same in 2019.”

Goldman Sachs analyst Pramod Jain expects wholesale volumes to grow in the fourth quarter, which is seasonally stronger because of harvest and wedding seasons.