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Event update: Automobiles - July 2019 retail sales – No respite!

Federation of Automobile Dealers Association (FADA) reported continuing weak automobile retail volume trend for July 2019, with the rate of decline broadly consistent with those in the previous months. While the inventory in passenger vehicles (PV) declined a bit, those in two wheelers (2W) and commercial vehicles (CV) remained elevated. The sentiment among dealers worsened, with a vast majority describing the situation as “bad”, on the back of rising liquidity concerns. Dealers attributed the decline to overall weak demand, regulatory headwinds (higher insurance costs/safety norms) and liquidity crisis. We believe the trends do not bode well for the upcoming festival season. Further, high inventory levels in CVs/2Ws could cause wholesale volumes to lag retail volumes. FADA hopes a stimulus package from the government and liquidity easing could help boost demand.

 

Retail sales continued to decline in July: CVs saw the sharpest decline at 14% yoy , with PV volumes witnessing ~11% yoy slide. The rate of decline in PVs was higher than the 5% yoy de-growth in June 2019, although the downtrend in CVs could have eased a bit (-20% yoy in June). We note though that for CVs, FADA reported data from ~50% regional transport offices (RTO’s) compared to ~75% of RTOs covered in June - this may have made a marginal impact on comparative rates of decline. The 2W retail volumes were down by ~5%, broadly matching last months decline. The de-growth in the sector seems to be a reflection of regulatory-linked price hikes, continued liquidity constraints and weakness in the economy.

 

Inventory shows a mixed trend: Despite production cuts, inventory levels remained elevated, particularly for 2Ws and CVs, at more than 60 days. While mom inventory days for CVs/2Ws remained constant, the same increased from 50 days to 65 days for 2Ws and 50 days to 60 days for CVs since April. On the other hand, with PV inventory at less than a month of sales (versus peak of 50-60 days in February), levels now seem to be under check. If the festival season remains weak, the segments with high inventory levels (2W/CVs) could find it difficult to clear BSIV models (BSVI will be implemented from April 2020). 

 

Dealer pessimism increases: Nearly 65% (versus 56% in June 2019) of the dealers were pessimistic and characterised the situation as “bad”. Additional 34% called the situation “neutral”. Similarly, 55% (versus 46% in June 2019) described the liquidity situation as “bad” – an indication that the liquidity situation remains a key area of concern.

 

State-wise performance –West Bengal (+37%), Bihar (+2%) and Uttar Pradesh (+1%) were major states to have reported positive yoy growth, with Maharashtra (-16%), Karnataka (-11%) and Rajasthan (-10%) seeing the highest decline, pointing to a negative sentiment across geographies. Even growth in West Bengal came largely on a low base (change in licensing regulations impacted volumes in June 2018).

Our view: The adverse demand scenario clearly persists on various factors, which includes tightening liquidity conditions. If the festival season remains weak, then segments with high inventory levels (2W/CVs) may be forced to offer higher discounts ahead of the shift to BSVI. On the other hand, easing liquidity, a stimulus package by the government and normal crop production could alleviate the stress. We prefer Maruti Suzuki (strong competitive advantages), Eicher Motors (strong brand equity, strategic measures) and Hero MotoCorp (inexpensive valuations).