Is the automotive sector back on the road to recovery?

Auto companies have been experiencing a positive growth in Q2, post the protracted lockdown of the first quarter of FY 2020-21. However, industry leaders are still skeptical about the future growth pattern. 

Sales of auto companies are picking up pace in the second quarter of the fiscal year 2020. While sales of passenger vehicles (PVs) grew by 17%, two wheeler vehicle (2Ws) sales grew by 2-5%. The significant growth rate is partly highlighted due to the low base to compare the Quarter 2 sales with on a YOY basis.

In September 2020 particularly, the recovery of the automobile industry is also visible through the positive growth in whole sale volume. Based on the volumes of Original Equipment Manufacturers (OEMs), it is estimated that the growth in wholesale for PVs was 28-30% YoY in September. The rate of wholesale growth in case of 2Ws has been estimated to be 11-13 % and tractors at 15-17%. However, wholesale volumes for medium and heavy commercial vehicles (M&HCV) are estimated to be declined by 16-20% YoY in September.

Changing consumer behaviour is one of the reasons driving increased demand for PVs and 2Ws. People in rural areas and middle class families are preferring private vehicles to avoid public transportation, given the threat of the COVID-19 pandemic. Therefore, there is also an increase in demand from first time buyers.

The festival season is also expected to bring an uptick in the sales in the automobile sector. Lasting around 45 days, the festive season usually brings twice the level of monthly sales for the industry. Vikas Jain, National Sales Head of Hyundai Motors Ltd. said that the company expects YOY growth of 16% for the industry in September 2020, with 10,000 deliveries for its vehicles on Dhanteras alone.

When talking about tractor companies, a significant share of their capacity has been utilised during June-July when the whole economy was in the midst of a slowdown. Exemption to farming activities by the Indian government is one factor that has protected tractor makers from the impact of the lockdown. Also, the good monsoon, higher crop sowing and higher support prices by the government are other factors that have boosted the sentiments of tractor manufacturers.

The industry has seen some positive growth after the setback it faced in the past few months of fiscal year 2020. The automobile industry was already facing the impact of the new GST regime, impending shift to BS 6 norms, Kerala floods and rise in insurance costs of vehicles in 2019. The disruption in demand and supply due to the COVID pandemic further impacted sales in the auto industry negatively. As per Federation of Automobile dealers Associations (FADA), retail sales of auto industry dropped to 88.87% in May 2020 YoY. In August 2020, the total vehicle registrations at the RTOs, which is a proxy for sales, fell by 26.81% YoY.

Even after the positive growth in sales in September, auto industry leaders are skeptical for the future growth pattern, as the downward trend of the COVID-19 pandemic is uncertain. Furthermore, the year over year comparison is on the low base of last year. Dealers have admitted that the enquiries and footfalls are good, but they are not necessarily leading to sales conversions. Future sales growth is heavily linked to how the economy progresses going forward, as well as how it impacts the sentiment in the consumer and institutional markets.