Further increase in petrol prices and levy of an additional duty on diesel vehicle would negatively impact passenger vehicle demand in the short term

Moneylife Digital Team

The festive season between Dussehra and Diwali on which the automobile industry has very high hopes turned out to be lacklustre, especially for the passenger car segment. Domestic car sales in October witnessed their steepest monthly decline in the past 10 years due to challenging demand environment, higher cost of ownership and running cost caused by inflation and increased fuel prices.

Vishnu Mathur, director general of the Society of Indian Automobile Manufacturers (SIAM) said, “The reason for the fall is mainly due to the high interest rates and high fuel prices and also a big drop (in output) by Maruti Suzuki.”

Despite the steepest fall in October, many brokerages believe that the auto industry would register moderate volume growth during FY11-12 due to low penetration levels and increase in per capita incomes. "With interest rate tightening cycle nearing its end, we expect interest rate sensitive segments like passenger cars and medium and heavy commercial vehicles (M&HCVs) to get some reprieve. This, coupled with softening of commodity prices, would result in stable cost of ownership. However, further increase in petrol prices and levy of an additional duty on diesel vehicles would negatively impact passenger vehicle demand in the short-term. Also, competitive intensity is also set to remain high in all the segments,” said Motilal Oswal Securities in a research report. According to the SIAM report, during October, domestic passenger car sales fell 23.8% to 1.38 lakh units compared with 1.81 lakh units in the same month last year. This is the second steepest fall in the monthly sales of passenger cars. Earlier, in December 2000, car sales fell by nearly 40%, compared with a year ago period.

During October 2011, Maruti Suzuki, India's largest carmaker, reported a steep fall of 53.2% to 55,595 units, mainly due to disruption of production at its Manesar and Gurgaon facilities. The labour strike at these plants resulted in production loss of around 40,000 units during the month and the company expects to reach normal level of production from January next year. However, even after adjusting for production loss, Maruti Suzuki's October sales were down 20% year-on-year (y-o-y) and 16% month-on-month (m-o-m).

In the passenger car segment, Tata Motors, the country's largest vehicle maker, registered marginal 2.3% growth on a y-o-y basis but on a m-o-m basis, sales fell by 4.6%. Largely sales of Nano (up 26.2% yoy) and utility vehicles (22.8% yoy) volumes led the growth. Indigo sales, however, continued the disappointing run, declining by 24.4% y-o-y during the quarter.

Edelweiss, in a research note said, "Post the festival season sales, growth has declined for all car makers. Companies with strong diesel models or with new launches have outperformed the industry. Bookings beyond the festival season do not provide any encouraging signs either."

During the festive season the bells and whistles were missing for the passenger vehicle industry. "The high fuel prices and interest rates deterred customers. With demand strong only for diesel variants, the industry has resorted to heavy discounting for selling petrol models," said Infinity.com Financial Securities or PINC in a research report.

Following continues rate hikes by the Reserve Bank of India since March 2010, the interest rates are also reached new levels. Last month the RBI increased repo and reverse repo rates by 25 basis points (bps), its 13th hike since March last year. This has resulted in the interest rates increasing by 525 bps over the last 18 months. At present, interest rates on car loans are hovering around 12%-16%.

However, despite the RBI's tightening measures so far, the country's headline inflation was 9.72% in September, the 10th straight month where it has remained above 9%.

"With a lacklustre festive season gone by, the passenger vehicle segment would find going tough in the coming months. Although the two-wheeler industry is on a better wicket, growth would be subdued due to the high base," added PINC.