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This article was first published 13 years ago

Auto dealers fear signs of low demand

Last updated on: April 5, 2011 11:24 IST

Malini Bhupta in Mumbai

The automobile sector has grown at a compounded annual growth rate (CAGR) of 28 per cent over the last two years.

The scorching pace of growth has been maintained all through 2010-11, too. But will this spectacular growth rate persist?

Auto analysts believe that while auto sales will continue to grow in FY12, some deceleration seems inevitable, as the cost of ownership continues to increase.

The last two years have seen auto sales zoom through the roof, taking the base to fairly high levels.


Auto dealers fear signs of low demand

Photographs: Tanushree Punwani/Reuters

This year, for instance, two-wheeler manufacturers have sold more than one crore motorcycles to consumers.

Of this, Hero Honda has sold 53 lakh, Bajaj Auto 38 lakh and TVS 20 lakh two-wheelers. Rajeev Bajaj of Bajaj Auto hopes to sell 42 lakh two-wheelers in FY12, which effectively translates into approximately 10 per cent growth annually.

Given that all automakers would be interested in targeting India's 22 million middle-class households, it's clear that on a high base, growth of 24 per cent y-o-y is unlikely.

Possibly this is why most auto analysts are no longer very bullish on two-wheeler manufacturers.


Auto dealers fear signs of low demand

Photographs: Punit Paranjpe/Reuters

Instead, they are betting more on passenger car manufacturers as the demand from this segment has not been exhausted yet.

However, macro headwinds are most likely to hit even the commercial vehicles and passenger car sales, too.

Interest rates have risen 250 basis points to 11.5 per cent in the past eighteen months and this is sure to hit the demand.

Given that CVs and passenger car sales are heavily dependent on financing, high interest rates will decelerate growth.


Auto dealers fear signs of low demand

Photographs: Amit Dave/Reuters

Another indication of demand deceleration has come from dealers. According to an Edelweiss Capital survey, among Maruti and Hyundai dealers, inventory has gone up from 15-20 days to 30-45 days.

Clearly, there is a build-up of inventory, as the demand has not kept pace with supply. Dealers now expect long-term average growth to settle at 10-12 per cent, contrary to the expectations of 15-20 per cent a quarter earlier.

As of now, automakers are not offering heavy discounts. If sales growth continues to slow down, the discipline may not be observed by automakers and dealers.


Auto dealers fear signs of low demand

This may have an adverse impact on margins, as automakers will have to offer higher incentives to dealers to generate sales.

There also is a school of thought that believes rural demand will remain robust, even if urban demand plateaus.

Analysts believe a lot depends on the purchasing power of the consumer and interest rate environment.

Deepak Jain, auto analyst at Sharekhan, explains: "In FY12, we expect passenger cars sales to grow 18 per cent, commercial vehicles 15 per cent and two-wheelers around 13 per cent."


Source: source