Demonetisation: Uncertainty looms in automobile sector, recovery depends on liquidity infusion
In the wake of demonetisation, vehicle bookings have dropped 30%-50% in urban areas and about 60% in rural areas. The real impact of demonetisation on automobile sector will be visible in December and could last till fourth (March) quarter of FY17. Recovery depends on how fast liquidity is infused back into the economy and on how soon the industry and consumers adapt to higher non-cash transactions, says a research report.
Religare Capital Markets Ltd hosted a conference call with the Federation of Automobile Dealers Association (FADA) to discuss the impact of demonetisation on India’s automobile industry. John K Paul, President, and Nikunj Sanghi, Director for International Affairs & Global Relations, represented FADA during the conference call.
Following the call, Religare says, while the immediate impact (of demonetisation) is evident, uncertainty looms over the pace of recovery in the medium term. "As India is in a transition phase of adapting to the effects of demonetisation, discretionary spending on passenger vehicles (PVs) could see a longer slowdown than two-wheelers. The impact on commercial vehicles (CVs) is linked with freight movement and rates and hence will be in sync with economic growth," the report says.
Inventory piling up
During the conference call, it was highlighted that inventories with automobile dealers are piling up. As per the discussions, lower retails have led to a higher inventory levels across dealers, at 45-60 days from normal level of around 30 days while the cash crunch has fuelled about 30% revenue drop even for repairs and services. FADA is requesting manufacturers and financial institutions to increase the credit period for dealers. It also expects manufacturers to reduce production and dealers to offer higher discounts towards the year-end to clear stocks.
CVs and premium PVs to bear the brunt
As per FADA, sales of commercial vehicles -CV- will be affected the most, followed by two-wheelers and passenger vehicles -PV. Entry-level PVs could be the least affected as a higher proportion of sales in this segment is to the salaried class and government employees. The fear psychosis of increased government scrutiny on high-value transactions is likely to dent demand for premium PVs in the near term, Religare says.
Recovery most resilient in two-wheelers
A revival in segments with high cash sales such as two-wheelers in rural areas will be contingent on the pace of liquidity infusion back into the economy. However, Religare says, with two-wheelers being considered a transportation necessity in most areas (except tier-1 cities), recovery should be most resilient for this segment once the economy returns to normal.
FADA, however, believes the trends of ‘scooterisation’ (regarded as a women-friendly family vehicle) and ‘premiumisation’ (especially for Royal Enfield) will remain unaltered in the near term.
Talking about effects of demonetisation across the regions, Religare sees South India to be more resilient. It says, "Of all the regions, FADA expects the south to be the most resilient given high literacy levels and familiarity with banking channels, followed by western markets. The northern and eastern regions could lag due to their higher dependence on cash transactions."
Resale values of used cars are expected to drop thereby discouraging demand from repeat customers, Religare says post the conference call with FADA officials.