Promising Road Ahead for Indian Auto Industry

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Source: Live MintAn increase in the number of car sales in India has prompted car manufacturers to line up new launches and raised hopes of a long-awaited turnaround for the industry.

148,577 cars were sold in India last month, an increase of 3.08 percent on the May 2013 figure of 144,132 cars, marking the first month of expansion in car sales since February. According to data compiled by the Society of Indian Automobile Manufacturers (SIAM), passenger vehicles, which include cars and utility vehicles, saw a year-on-year growth rate of 2.76 percent. Excluding August 2013, this marks the first growth in passenger vehicle sales in more than 15 months.

The SIAM data also revealed that 1,402,830 two-wheelers were sold last month, an increase of 16.3 percent on the 1,206,173 units sold in May 2013. Within this sector, motorcycles sold especially well, with a growth rate of 11.71 percent and sales of 984,469 units compared to 881,288 last year. It was not such a good month for commercial vehicles, which include trucks and buses, with total sales being down by 15.28 percent to 46,986 units. However, the overall growth rate of vehicles across the different categories saw a year-on-year growth rate of 14.22 percent, an increase from 1,499,893 units in May 2013 to 1,698,138 units last month.

“Our members are saying that footfalls have increased at showrooms, with higher conversion to retail sales and deliveries,” said Vishnu Mathur, the director general of SIAM.

Most car companies saw an increase in car sales in May. Maruti Suzuki, Hyundai, Honda and Toyota saw sales increase by 16.4 percent, 12.8 percent, 18 percent and 18 percent respectively compared with May 2013 figures. Ford India saw a 51 percent jump in sales from April.

However, it was not good news for all car companies. India’s fourth largest car company, Mahindra, saw its sales fall from 22,244 to 18,085 units year-on-year, a decrease of 19 percent, following heavier taxes on its sports utility vehicles. The Indian operations of General Motors also suffered last month, seeing a 43 percent drop in sales from April to May.

Until last month, sales in the Indian automotive sector had slumped for more than a year against a backdrop of two consecutive years of sub-5 percent GDP growth, weakening consumer sentiment and rising interest rates. Passenger vehicle sales in India shrunk by 6 percent in 2013-14, the biggest decline in ten years.

“After a long time, the domestic market is in the positive zone. We have seen an uptick in retail deliveries and the momentum continues in June,” said Mayank Pareek, the head of marketing and sales at Maruti.

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There are a range of factors behind the increase in sales, including the reduction in excise duty that was announced by the previous government in February and a series of new launches, including Honda’s City saloon and Maruti Suzukis’ Celerio hatchback.

Sales were also boosted by improved consumer sentiment related to hopes that the newly elected president, pro-business Narendra Modi, will revitalize the US$1.8 trillion Indian economy that had slowed under the previous government. Indian companies are depending on Modi to add jobs, bring down inflation, raise income and revive consumer demand.

“The automobile industry has been passing through challenging times for the past two years as the general economic and consumer sentiments have failed to pick up. Going forward, we hope to see some improvement in the market in the coming months with a new decisive government in place,” said P. Balendran, the vice president of GM India.

Consumer sentiment began to improve even before the election on the expectation that the former government, which has been labeled the “worst Lok Sabha in India’s democratic history” by some of the media, would be replaced. The S&P BSE India Auto index, comprising 10 constituents, has increased by 20 percent this year in anticipation of growth in the industry.

Industry analysts are currently waiting to see which new economic reforms will be implemented and whether the new government will increase excise duties.

“We hope the government will retain the current excise rate beyond June 30. Also, we are looking forward to the rollout of the GST (Goods and Services Tax) and environmental clearances for industrial projects to kick-start the economy,” Marthur said.

“The next six months will be a rebuilding of the market – we’re still in a very fragile stage,” said Deepesh Rathore, director of Emerging Markets Automotive Advisors.

Despite signs of improvement in the May numbers, weak monsoon rains could still dampen growth in the sector, SIAM said earlier this week. Below average rainfall, which was predicted by Indian weather officials this week, could result in lower incomes for many of the rural households which rely upon monsoon rains to irrigate farmland. Segments of the automotive industry which rely significantly on demand from rural areas, including two-wheelers and small cars, would bear the heaviest impact should this occur.

However, it is still too early to judge this season’s monsoon. “It is really premature to make a definitive comment now. In any case, the effect of a bad monsoon is felt only in the subsequent year if there is a recurrence of poor rains,” said Pravin Shah, the chief executive of Mahindra’s automotive division and international operations.

Additionally, a recent analysis by the ET Intelligence Group found that the automotive sector will be among the sectors hit hardest by the rupee’s rise to an 11-month high against the U.S. dollar, along with the pharmaceutical, textile and steel sectors. Car companies which derive a large slice of revenues from exports will be impacted the most by the appreciation of the rupee. However, earnings of the 2014-15 financial year would only be gradually affected.

Despite these potential hurdles, the positive growth seen in May has prompted automakers to organize several new launches for the next few months. Honda’s Mobilio minivan has been lined up for July and Maruti will soon be launching its new Sx4 S-CROSS as well. Hyundai is also considering launching its next generation i20 hatchback in India. In addition, Tata Motors will launch its new Bolt hatchback and Zest compact sedan later this year.

Several automotive companies have also announced their intention to open new factories and showrooms. Despite cutting back production in existing factories, Mahindra announced last month its plans to spend US$676 million on a new plant which will manufacture 400,000 units per year. Ford has also announced that it will open a new facility in Gujarat next year as part of it plans to raise output in India.

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The launch of new models and the opening of new manufacturing facilities are expected to further boost growth this year. Due to the high proportion of car purchases in India being financed by loans, the car industry will also benefit from the Reserve Bank of India cutting its benchmark repurchase rate by around 0.5 percent in early 2015. Car sales in India are expected to rise this fiscal year after two years of decline.

“A turnaround in the economy will help auto sales grow 10 percent in 2015,” said Rathore. “The downturn we have gone through is a minor blip on the long-term horizon. Capacity planning is for the long term and the growth story is pretty much intact.”

Citigroup and Morgan Stanley predict that India’s economy will expand by 5.6 percent and 5.4 percent respectively in the 2015 financial year, compared with 4.7 percent in the previous year.

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