Indian Auto Sector is Shaking

Automobile sales numbers are like some kind of a guidance on the economy’s strength. If it is growing, it means people have money to spend and that will give support to other sectors. When it declines, it shows that there is very less money in the hands of the people.

Sales numbers for the month of may showed decline for almost all the companies in India, barring TVS & Bajaj. Maruti taking the biggest hit with a decline of more than 17% in sales.

Maruti has been continuously in focus for all bad reasons in the recent months. They decided to shut down diesel car production from April 2020. Sales is down and recently they are announcing shut down of factory to reduce inventory.

Inventory control shut down has come across all the manufacturers because of huge inventory build up with both, the manufacturers and distributors. There are 35K crores worth of produced cars unsold and about 18K crores worth of 2 wheelers unsold.

The damage is more to the distributors as they are holding stocks for more than 75 days, on which GST is paid. AT the GST rate of 28%, which has to be paid on the month of billing. Distributors are not only holding unsold stocks, they have also funded the GST portion.

All these dead stock has blocked huge capital, where interest expenses will be there on the balance sheets. It will take a couple of quarters before any significant revival is seen. Rural consumption is poor, was the reason stated for the decline in sales. Rural population has less money because farm produce is less and they get pittance for their produce.

It is not only the woes of rural population, even urban side, the story is same. Most of the businesses in our country have been reporting poor sales growth. This shows that, people are not buying produce. Why are they not consuming? Either they don’t have money or don’t have a need.

For a diverse country like us, need has always been there. Only that money has been in shortage. Which is not a new scenario rather. Jobs have become a challenge, growth in salary income per individual might have also been a challenge. Else, consumption will not get impacted.

The next issue was tight liquidity as NBFC’s were starved of funds. So, low financing for consumer goods and automobiles. Up on this issue is the defaults from many big names, which is further tightening money supply.

How are we going to improve this?

If there is no consumption, companies will have surplus capacity. This will bring the next challenge on creation of new manufacturing facilities. This will trigger low credit off take.

Reducing interest rates is one small step, it will not trigger a change. Something dramatic has to happen. For the auto’s EV is the next threat.

The 2025 deadline set by the government to move all two & three wheelers to electric has welcomed discontent from 2 big names in the industry. TVS & BAJAJ, they are crying foul because they are not ready for the change. They have huge investments made, which are yet to pay out, which will mean a big blow on their finances.

Having all these issues, yet the SENSEX & Nifty have been reaching new high’s. An indication that, only a handful of stocks are moving the markets and not the whole economy. Government is working on reducing GST charges, which should also be a small contributor to trigger consumption. Along with the small changes, some very big reform or aggressive decision is required to fuel the markets to the upside. Until then, we are likely to witness a range where accumulations will continue and set pace for the next rally.