Surging auto sales may slow down

Despite steadily rising fuel prices ever since decontrol was introduced, sales of cars have shown a relentless surge month after month. Indian automakers are confident that the industry will continue to see double-digit growth of about 15 per cent on the back of favourable income growth outlook, even though a report by Barclays Capital Research also said the recent acceleration in automobile sales in China, India and North Asia is unlikely to sustain due to increase in borrowing costs and oil prices.

In India, cars and two-wheelers have so far defied the factors cited in the Barclays report and grown at a phenomenal 27 per cent in 2010. This has been followed by another 27 per cent growth in January 2011, and figures released on Wednesday showed a surge of 23 per cent in February with domestic demand remaining buoyant on the back of positive consumer sentiment. However, pre-budget buying to avoid a likely increase in excise duty in the Union budget 2011-12 was also partially responsible for the strong growth.

“If we look at the momentum and rate of growth, they have certainly been coming down. Overall, rising borrowing rates, tight liquidity conditions and higher fuel costs would mean auto sales are likely to moderate if the situation persists for a sustained period,” Rahul Bajoria of Barclays Capital told Financial Chronicle.

“Obviously there will be some economic events that will slow things in the coming months and normal economic or business cycle will take hold. But India and China are highly under-motorised nations unlike Japan, which is highly saturated as far as automobiles are concerned. Roads are getting developed in India and China. So long as the road development happens, there will still be good number of vehicle production,” said Shekar Viswanathan, deputy MD - commercial, Toyota Kirloskar Motor.

“Despite increasing interest rates and oil prices, we will continue to see some growth but it will not be of the same magnitude which we saw in the past couple of years. Overall, there is need for motorisation in India as several parts of the country are underdeveloped and it will continue to drive vehicle production,” he added.

Gasoline prices have risen by as much as 13 per cent since June 2010 (Rs 51.43) to Rs 58.37 now. Interest rate on car loans from public sector banks like State Bank of India have increased to 9 per cent while it has increased to 11.5-12 per cent in the case of private banks like HDFC and ICICI since June 2010 when it was 9-10 per cent.

SBI had first reduced the interest rate to 8 per cent in February 2009, a time when car sales had been dipping between September 2008 and January 2009. This, along with the excise duty on small cars being reduced to 8 per cent from 12 per cent and to 20 per cent from 24 per cent on bigger cars from January, made the auto industry drive back to the growth trajectory and there has been no looking back.

However, as demand started picking up in 2009, post this stimulus, the government rolled back excise duty by 2 per cent in the budget for 2009-10, resulting in a duty of 10 per cent on small cars and 20 per cent on bigger cars. Even this couldn’t put a brake on car sales. Car sales grew 30 per cent to 1,788,503 units between April and February, according to Siam data released on Wednesday. In February, car sales touched a record high of 189,008 units, up 23 per cent from the year ago period.

“The acceleration in auto sales may be shortlived. Tighter monetary conditions on the back of inflation worries coupled with higher oil prices could slow the recent acceleration in auto sales in Asia despite strong wage growth in the region. The risk of a slowdown is higher in China, India and North Asia due to reduced credit availability and higher oil dependency,” according to the Barclays report.

P Balendran, VP, General Motors India, also said that the growth would moderate in the coming years. “Credit availability is comfortable as of now but the cost of finance has become dearer in recent months, which is a dampener and has the potential to bring the market sentiments down. Any hike in interest rate slows down the market. Now with petrol prices going up and banks increasing interest rates at regular intervals following RBI’s bid to contain the growing inflation, the market is expected to slow down in the coming months. The crisis in West Asia has made the situation further volatile. “We still expect the market to register double-digit growth say between 14-16 per cent this year against over last year’s 30 per cent growth ,” he added.

“The present growth rate of about 30 per cent is definitely not sustainable in the passenger car segment. However, we are bullish on the demand and will see strong double-digit growth at about 15 per cent in the coming years,” according to Arvind Saxena, director - marketing, Hyundai Motor India.

However, Vishnu Mathur, director general, SIAM, raised concerns. “The month-on-month sales are not coming down, but there is a moderation in growth taking place. So far, the growth was 30 per cent in the financial year but in February it was 23 per cent. The base has been growing, so growth rate will moderate in future.”

Sales are happening because of rising incomes of the middle class, which forms a major chunk of the population. People usually spend their first disposable income on buying a vehicle. Most Indians are yet to buy a vehicle, with the car penetration level at a low 14 per 1,000 people.

Maruti Suzuki feels that though car sales are increasing on a monthly basis, the slowing down of the growth pace (percentage) is a concern. “The numbers we look at are wholesale data (dispatches from factories to dealers) and not retail data (actual sales at dealerships). In December, the industry hardly had any inventories, as the industry didn’t anticipate such an increase in demand last year. However, retail sales are not really happening at a brisk pace and thus stocks would have gone up at the dealers’ end. This is the reason why we fear that the industry growth will taper down because of high base effect, fuel price rise and higher interest rates. However, the sentiment remains strong with strong economic growth fuelling purchases,” said Shashank Srivastava, chief general manager (marketing), Maruti Suzuki India.

While S Sridhar, CEO - two wheelers, Bajaj Auto India, stated that tighter monetary measures and higher oil prices along with raising commodities prices would moderate the growth rate of the auto industry, HS Goindi. president - marketing, TVS Motor, said the growth in coming years would not be the same as in previous years. While the two-wheeler industry grew at a CAGR of 10-12 per cent over the last 10 years, we may expect a CAGR of 14-16 per cent over the next few years. Increasing interest rates and higher oil prices will not have any big impact on the two-wheeler segment. As long as the economy grows, we will also see some strong growth,” said Goindi.