Automobile Sales Data Sparks Worry About Q2, Dealer's Hope for Festive Season Cheer

For India’s automobile sector, the upcoming festive season is likely to be a crucial test that the industry cannot afford to fail. The Federation of Automobile Dealers Associations' (Fada) latest data has already raised a 'caution' banner for the industry as major dealers and manufacturers are witnessing inventory pile ups, especially in the Passenger Vehicle (PV) segment.

Last month, retail sales dropped by nearly 9.26 per cent year-on-year, raising concerns not just for the overall demand levels but also for the upcoming Q2 results. Tata Motors has already reported a lackluster quarter as global wholesales of PVs stood at 130,753 units, marking a decline of 6 per cent compared to the same period last year. For the commercial segment, the decline was even sharper.

While subdued demand was quite visible during festivals like Ganesh Chaturthi and Onam, the industry is still hoping for a bounce back in demand owing to the Diwali season ahead. But for analysts, the road to recovery for the demand cycle in the automobile space is still turbulent.

Roadblocks Stack Up for India's Auto Sector

According to data, stock levels have already hit the 80-85 days mark, with nearly 7.9 lakh vehicles worth about Rs 79,000 crore. This has raised concerns ahead of the upcoming Q2 results.

Besides the growing inventory pile-ups, the outlook for India’s automobile segment might take a hit from lower margins as well, thanks to discounts that analysts believe are at an all-time high. This is likely to put extra pressure on profit levels. Plus, Fada has already called out original equipment manufacturers (OEMs) to take corrective measures to avoid any type of financial barrier.

"There was a visible decline in PV volumes, primarily because of measures taken by PV OEMs to correct the high inventory levels. We also expect lower margins during the quarter as the discounts remained at an all-time high. During the period, the retail sentiment was observed to be muted, as the demand pickup expected on the back of the Q2 festivals was not up to the mark," said Sagar Shetty, Research Analyst, StoxBox.

On the consumer end, the wait for new car models is something that is further dampening the outlook for the industry. The launches ahead might have prompted people to put a pause button on their buying decisions.

Many new models, like the Mahindra Thar Roxx, New-Gen Maruti Dzire, Kia Carnival and Tata Nexon CNG, have just or are set to hit the market. This might have led to hesitation in decision-making, as buyers wait for better options.

"New model launches with competitive prices can also be a reason for the delay in buying decisions, resulting in higher inventory and forcing automobile companies to offer huge discounts for older models to clear the inventory eventually resulting in lower profits in coming quarter results," Prashanth Tapse, senior vice president- research at Mehta Equities.

However, the near-term outlook remains weak owing to the combination of issues like high inventory pileup, high discount offers, low demand and lined up new model launches with competitive prices.

During the April-September period of this fiscal year, overall retail sales across various segments surged by 7 per cent. While PV registrations saw a modest rise of 1 per cent, the 2W space delivered better performance as sales jumped by 9 per cent year-on-year.

The comparatively better performance of 2W is owing to multiple factors like the rise of premium products, improved monsoon conditions, a low comparison base and the growing popularity of electric vehicles, said Ashwin Patil, senior research Analyst, LKP Securities.

Road to recovery anytime soon?

The first half of CY24 has been relatively subdued, but analysts anticipate a revival in the overall outlook for the second half. However, the cautionary banner still remains in the air.

Jathin kaithavalappil, AVP-institutional research at Choice International believes that consumer expenditure is likely to gain momentum during the festive season and industry leaders are thus expected to see higher bookings and footfall.

"We expect all vehicle segments to bounce back, as the top dealers predict an increase in sales by 5 per cent- 10 per cent," Kaithavalappil said.

While there is a chance that seasonal factors, like the Shraddh period, might have led to the declining figures, pressures still loom for the automobile space. As for now, the Diwali season ahead seems like the only hope for the sector.