Revival to perk auto sales in 2013

Rohit Joshi and Siddharth Tak/Zee Research Group

Will auto industry push the accelerator next fiscal or just about sustain the 0-1 percent growth predicted by the Society of Indian Automobile Manufacturers (SIAM) for 2012-13? Analysts are unanimous in their verdict of 2013-14 being a turnaround year for the auto sector with a potential cut in policy rates being the key factor to trigger handsome growth. The GDP growth rate too is likely to witness a surge during the next fiscal to perk the sentiment. The year 2012 has been rough for the industry as negative sentiment engulfed the sector. Major negatives were the slowdown of GDP growth rate, rising fuel prices, and the higher financing rates. Soumya Kanti Ghosh, director at FICCI, asserted, “Policy rates would definitely be reduced. We are assuming that interest rates would be slashed by nearly 150 basis points (bps) in 2013. Hence, the lower interest rates would be beneficial for the auto sector as well as for the consumers.” Another school of thought came from Subrata Ray, senior group vice-president, ICRA, who opined, “The reduction in financing rates following a system-wide decrease in interest rates is expected to be a positive for the sector as cost of ownership for passenger vehicles has been steadily rising over the past few years, driven by increase in fuel costs, spiraling EMIs (as a result of higher interest rates) and increased vehicle prices.” Backing the revival sentiment, Saugata Bhattacharya, Economist, Axis Bank, affirmed, “Although third quarter GDP figure this fiscal is likely to be pretty bad yet it is assumed that GDP growth rate would bottom out in the quarter.” Ray at ICRA, believed that volume growth is expected to recover. However profitability could witness some pressure in the near term. “We expect the industry to register a growth of 9-10 percent in FY14 (2013-14) as against the estimated figure of 5–7 percent domestic volume growth in FY13.” However, he cautioned that the profitability metrics of industry participants were unlikely to have any meaningful respite over the near term in view of increase in expenses related to launch of new models, increase in employee costs as several original equipment manufacturers (OEMs) have announced substantial wage hikes and likely sustenance of discounts-led sales push made worse by restricted pricing power in the wake of intense competition. Reiterating the view of better sales volume growth, Mahantesh Sabarad, senior vice-president, equity research, Fortune Equity Brokers (India) Ltd, who tracks auto sector closely, said, “Yes, the sales growth will improve in FY14 (2013-14) as slew of policy reforms have been initiated by the government. Moreover, the new models of utility vehicles (UV) launched in the recent months would continue to boost robust growth for the auto sector.” Fiscal year (2013-14) could see softening in diesel car demand as the government has permitted oil marketing companies to hike diesel prices by 50 paise a litre per month. This is expected to revive petrol segment sales and reduce the relative attractiveness of diesel cars. Commenting on this aspect, Ray at ICRA, said, “The trend in increasing consumer preference for diesel-run cars over petrol ones had started gaining momentum from 2011-12 onwards as reflected in the strong 37 percent sales volume growth of diesel cars vis-à-vis the decline of 14 percent in petrol car sales. With this, the share of diesel cars in the passenger vehicle (PV) industry’s sales mix increased from 21 percent in 2007-08 to 48 percent in 2011-12. Similar trend has continued in the current financial year as well. However, some moderation in demand for diesel cars has started largely on back of increase in diesel prices and high-base.” “Moreover, further increase in diesel prices (in a phased manner) as being announced by the government will increase the payback period from diesel cars and upend the demand back in favour petrol cars to an extent,” added Ray.