For half a decade now, India’s automakers have had it good as smoothly cruising sales prompted rosier forecasts.
The London-based market researcher IHS Markit in its most recent forecast had predicted that India would emerge the world’s third-largest passenger vehicle market by 2021. Similarly, CARE Ratings had forecast a growth of 8%-10% in car sales for the ongoing financial year which ends on March 31.
Then came the shocker. Last week, the country’s largest car-maker Maruti Suzuki announced a year-on-year fall of about 17% in net profits for the October-December quarter.
A speed bump was expected given that only last month the company had tempered its sales forecast for this financial year. Yet, the magnitude of the fall caught analysts by surprise, and many brokerages hurried to revise their post-earnings analysis scripts.
Not surprisingly, investors fed on buoyant predictions were left jolted.
Maruti’s shares closed 7.4% down on the BSE stock exchange on January 25, the day the results were announced. Once a stock market darling, the company’s shares have fallen around 20% since the start of 2018.
Though other major players are yet to release their earnings numbers for the quarter, Maruti’s troubles, along with the industry-wide slowdown, are a pointer to what’s in store for Motown.
While announcing its results, Maruti said the industry may have in fact shrunk by 0.8% in the October-December quarter.
Overall automobile sales (including two- and three-wheelers and heavy vehicles) grew about 15% in the previous financial year ended March 31, 2018, according to the industry body Society of Indian Automobile Manufacturers. But “the new normal will be sub-10%. That we have to get used to,” said Kumar Kandaswami, a partner with Deloitte India.
Busy road
Blame this on a mix of reasons including high fuel prices, rising insurance costs, and the popularity of ride-hailing apps.
Petrol and diesel rates in the country were volatile in 2018, deterring many from buying cars, Kandaswami said.
Rising borrowing and insurance costs are also weighing down sales, according to Darshini Kansara, deputy manager at CARE Ratings. In October last year, the Insurance Regulatory and Development Authority of India raised the upfront premium required to be paid on car insurance. It also hiked the minimum driver insurance from Rs2 lakh ($2,805) to Rs 15 lakh.
Auto loans have also become marginally expensive, Kansara added.
Moreover, the increased adoption of ride-hailing apps like Ola and Uber has shaved off demand.
“The utilisation of private cars is around 5%. In ride-sharing, the fleet utilisation is upwards of 25%,” Kandaswami said. “Inherently, the same car is used many more times. That is bound to have an impact on sales volumes.” And while sales of new cars are down, more and more people are now buying used cars, he added.
However, 2019 may be good for volumes. Sales will revive as carmakers clear their inventory with heavy discounts before new emission standards are enforced starting April 2020, Kansara said.
This article first appeared on Quartz.
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