Auto industry believes that weak demand cycle has bottomed out

As election fever reaches its peak, there is a new mood of hope in the automobile sector over a demand recovery after two straight years of slump.

Passenger vehicle (PV) sales are expected to see a moderate growth this year. Two wheelers are expected to sustain the growth momentum. In medium and heavy commercial vehicle (M&HCV) segment, there is a positive signal from the firming up of freight rates during the last quarter of 2013-14.

So, has the turnaround begun? Well, recovery may be in the anvil, but joy will be still some time away. The outlook seems to have shifted from bleak to a positive scenario in the wake of recent sales trends as well as high expectations from the new government. The auto industry believes that the negative trend is vanishing from the radar and it would enter into positive territory in the coming quarters. There is overall optimism that real recovery may start from second quarter post formation of a new government.

Caught in the grip of the longest ever down cycle, the commercial vehicle industry has been the worst hit with total volumes contracting by 20.2 per cent in 2013-14. The medium and heavy commercial vehicle (M&HCV) segment has been particularly bearing the brunt of subdued industrial activity with a de-growth of 25 per cent.

However, M&HCV volumes have been growing on a month-on-month basis for almost past two quarters. Freight rates have also firmed up during January-March 2014 period. Though there is mixed feeling on the recovery front, the industry is now believing that the weak demand cycle appears to have bottomed out.

Tata Motors’ Executive Director-Commercial, Ravi Pisharody says that the company is cautiously optimistic about an upward trend in freight rates: “Although there has been an increase in freight rates over the last couple of months, there really hasn’t been an uptake in CV sales, though our production plans are constantly calibrated in tune with the reality.”

He admitted that the biggest concern for the CV industry is the challenging macro-economic environment in the country.

However, Vinod Aggarwal, CEO of VE Commercial Vehicle felt that the CV cycle has bottomed out and there was a lot of positive mood building up in the system. “If you look at the heavy-duty trucks segment, drop levels have started coming down. Q1 of 2014 saw a drop of just 10 per cent as compared to a drop of 38 per cent in Q1 of 2013 (over Q1 of 2012),” he said adding, “there was, interestingly, rise in sales of tractor-trailers. So, some of the segments are growing and with a new government at the Centre, the CV industry should see improvements going forward. Also, freight rates have firmed up, indicating absorption of excess capacity in the system.

“When recovery happens in CV industry, it is heavy-duty that first gets to see the signals and improvements in volumes. Going by the current trend, there are some recovery signals in the heavy segment and we hope medium and light categories will follow suit in the coming quarters,” said Mr.Aggarwal.

But Ashok Leyland’s Managing Director Vinod Dasari is still cautious about the recent positive signals and stated “it is too early and we have to wait till the election gets over,’ adding “But, I hope the slump cycle has bottomed out.”.

Analaysts feel that M&HCV sales would start showing signs of recovery from second half of the current fiscal. “The extent of improvement will be muted as surplus in the trucking system, sharp rise in repossession of vehicles over the past few quarters and drop in prices of second-hand vehicles would act as deterrent for new CV demand. We expect M&HCV sales to grow marginally in 2014-15 with growth largely skewed in favour of H2,” said Subrata Ray, Group Vice President, Icra.

In the PV segment, there have been a few winners despite sinking volumes of cars and utility vehicles. PV volumes shrank six per cent at 2.5 million units. The overall dull demand environment on account of prolonged high inflation, pricey fuel and high interest rates deterred customers from buying cars, particularly first time buyers.

Car and UV sales plummeted by five per cent each at 1,786,899 units and 525,942 units in 2013-14. But PV makers continued with their plans of rolling out new models or variants. In 2013-14, 11 new models and many variants were rolled out. Despite lukewarm market response to many of them, industry doesn’t seem to be showing signs of compressing its new products launch pipeline. “It is a reflection of the strong competitive character of the PV industry as also the strong medium-term growth opportunity offered by the large-sized PV market,” Mr. Ray said.

IThe new launches helped some as the rising income levels spawned more number of affluent Indians who have developed lower sensitivity to factors such as inflation. Interestingly, luxury car sales’ march continues while mass car market is battling. During the Q1 of 2014, the top two brands Audi and Mercedes-Benz recorded their best-ever quarterly volumes and are confident of sustaining double digit growth curve. The two iconic British brands Jaguar and Land Rover are also seeing momentum. “In fact, the growth would have been far higher had the corporate/business segments done well — a large number of users of luxury cars get them as a part of their compensation,” said Kumar Kandaswamy, senior director, Deloitte India.

Two wheelers are to continue their joy ride backed by a strong rural demand for motorcycles and increasing popularity of automatic scooters. The segment ended 2013-14 with positive growth. Though there is finally a measure of positive sentiment, the auto industry is anxiously hoping that the elections will throw up a stable government. And that will be the key to understanding whether these recovery signs are for real or just a mirage.

balachandar.g@thehindu.co.in

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