Millennium Post

Auto cos hope for moderate sales growth in 2014

Growth in domestic automobile sales slackened to a mere 1.2 per cent in January-November 2013 compared to 6.2 per cent during 2012 and 14 per cent in 2011, according to a Dun & Bradstreet report.

While an immediate upturn is not expected in the auto industry, expectations of improvement in the economic environment from the second half of 2014 along with potential interest rate cuts are likely to provide support to auto sales in the year ahead. Deferred purchases are expected to get converted into actual sales, mainly after the initial two quarters, owing to a pick-up in industrial activity and increase in infrastructure spending.

An improvement in consumer sentiment, particularly in rural areas, would act as a positive trigger for certain segments and companies within the auto industry and increasing competition is likely to keep profit margins under pressure. Up to November 2013, auto exports grew by 5 per cent, driven by exports of two-wheelers (4.2 per cent). In an attempt to offset slowing sales growth in the domestic market, auto companies increased their focus on overseas markets (mainly emerging markets).

However, in the coming year, exports are likely to further lose some steam in light of the non-tariff barriers and preferential duty agreements inked by the EU with certain African and Latin American countries. The latest move may act as a deterrent to auto companies which had begun to make strong inroads into these economies. The export environment for automobiles is expected to remain challenging in 2014, clouding India’s dreams of being an export hub.

Till November 2013 sales of commercial vehicles (CVs) entered negative territory as the slowdown in industrial activity, coupled with sluggish infrastructure spending, tight financing environment and frequent diesel price increases, led to a sharp contraction of 15 per cent  in domestic CV sales.

While the sale of medium and heavy vehicles (M&HCV) continued their downward spiral (-29 per cent up to November 2013), the year saw the light vehicle segment’s (domestic sales down by 6.1
per cent) also bear the brunt of weak macroeconomic environment and low freight availability.

Sales of CVs are expected to remain under pressure till the first half of 2014 in view of sluggish industrial demand and surplus fleet capacity. Thereafter, an expected improvement in the economic environment and increase in infrastructure spending might bring about a gradual revival in demand.

While the recovery in M&HCVs will lag the revival in economic growth, LCVs (driven by the
SCV segment) are expected to witness strong growth in 2014 owing to replacement demand and improving demand from tier II and III cities. Phase II orders under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) programme too are likely to provide an impetus to bus volumes.

The buoyancy in domestic passenger vehicle (PV) sales has been on the wane since the beginning of 2013 (-7.5 per cent up to November) as rising fuel prices and high interest rates led to a sharp increase in ownership costs, deterring customers from making vehicle purchases. The year ahead will continue to remain challenging for the PV industry. Car makers are likely to go ahead with their capex plans in anticipation of a demand recovery by the second half of 2014.

Meanwhile, with the differential between petrol and diesel prices getting narrower, the coming year is likely to witness the share of diesel cars in the industry mix gradually declining, considering the higher prices of diesel vehicles.

The slowdown in two-wheeler domestic sales continued into 2013 as increase in fuel prices, high interest rates and inflation significantly weighed down urban consumer sentiment. Domestic sales of two-wheelers slowed down to 4.1 per cent till November 2013 against a growth of 5.8 per cent in 2012 and 15.9 per cent in 2011.

Demand for two-wheelers is expected to pick up during next year, supported by moderation in inflation levels and a revival in consumer sentiment. The under-penetrated rural market will be the key driver for the industry’s growth which, however, is expected to remain in single digits.

Automobile companies across segments continue to face tremendous pressure on profit margins due to weak sales and heavy discounts offered by vehicle manufacturers to attract consumers to showrooms. To withstand the ongoing slowdown, Original Equipment Manufacturers (OEMs) have adopted various cost rationalisation measures and also focused on innovation and quality improvement.

However, margins of auto companies are expected to remain stressed at least till the first half of 2014 in view of the weak economic outlook. Competitive pressures are likely to increase going forward as some of the new OEMs scale up their distribution reach, resulting in higher marketing costs. On the raw materials front, prices of commodities such as steel and rubber are likely to remain firm in the coming year. However, no sharp spurt in prices is expected.
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