After the phenomenal build-up to and the subsequent launch of the Tata Nano, there’s been an increased interest in cars. Sadly, that might not translate into increased profits for the industry. Worse, it appears as if the entire automobile industry is entering a cyclical downtrend. According to the Society of Indian Automobile Manufacturers, growth in domestic sales in April-January 2008 slipped by 4.82% compared to the same period a year ago. Sluggish sales were largely because of tighter liquidity conditions and hardening interest rates.
|“It is important to keep in mind the inherent cyclicality of demand. Specifically, after three or four years of growth, the automobile market tends to slow down for a year or two and recover subsequently”|
Priyamvada Balaji, Director, Fitch Ratings
|“For four-wheelers, strong double-digit growth is possible due to changing demographics”|
Ramnath S, Director, IDFC-SSKI Securities
Macro issues such as a higher base effect and cyclical trends could prolong the slowdown. Analysts expect this trend to continue for two to three quarters. “It is important to keep in mind the inherent cyclicality of demand. Specifically, after three or four years of good growth, the market tends to slow down for a year or two and recover subsequently. This has been an ongoing feature of the market,” says Priyamvada Balaji, director, Fitch Ratings.
Analysts also seem worried about steps like free insurance and different discounts offered by companies to spur lacklustre sales. Not only do such measures squeeze already sluggish margins, they could put pressure on profitability. Although exports are still robust for two-wheelers and commercial vehicles, their margins are lower than domestic sales.
Fortunately, the sluggishness in sales might not be uniform across all segments. While the two-wheeler industry was clearly affected by hardening interest rates, analysts expect the passenger car and light commercial vehicle segments to clock robust growth numbers. “For four-wheelers, strong double-digit growth is possible due to changing demographics.
A number of firsttime buyers are directly moving to cars rather than first buying twowheelers and moving to cars,” says Ramnath S, director, IDFC-SSKI Securities. This could also affect the sales growth of two-wheelers. The sales of commercial vehicles might fluctuate for the next one year. With the emergence of the hub-and-spoke network system in the logistics sector, analysts expect increased sales of light commercial vehicles and trucks, as these vehicles ferry goods from hubs.
|FACTORS TO WATCH-OUT FOR|
|GDP growth and IIP numbers|
|Rise in industrial growth and mining activities|
|Change in emission norms|
|Change in demographics|
|Disposable incomes and affordability levels|
|Growing proportion of young population|