Indian Automobile Sales – a perspective over..

Indian Automobile Sales – a perspective over the last 15 years

The Automobile industry has been in the limelight over the past few months. Various sales reports have been released by the industry which shows that the continuous slowdown each month.

So, is the Indian auto industry in an unprecedented slowdown with structural implications for the Indian economy? There is a lot of speculation as to what is going on. Reasons ranging from overall slowdown, Uber/Ola effect on millenials, high GST, BS VI migration etc. have been given.

Before looking at other aspects, let us try to look at the data in more detail.

Difference between retail sales and sales reported by companies

While the drop-in company sales are a matter of concern, one also needs to understand the difference between retail sales (end customer sales) and company sales (wholesale dispatch by automobile companies) based on SIAM data

• Industry sales fell y-o-y by 23% in August (from 23.82 lakh to 18.21 lakh vehicles)
• Retail sales in India fell y-o-y by 4% (from 16.69 lakh to 16 lakh vehicles)

It is worth understanding the difference in these two numbers. The end customer sale/demand has been around 16 lakh vehicles. The industry had increased production to almost 24 lakh vehicles last year. Has this resulted in increased inventory at the dealer outlets and resulted in panic at manufacturers’ end?

India Motor Vehicle Sales – Quarterly growth rates from 2005 to 2019

Looking at the quarterly growth rates from 2005 to 2019 in the accompanying chart, we found the following data points to be interesting

• High base effect of 2018– In 2018, particularly in Q1, the industry had very high growth rates touching 30% in May 2018 (of course, that does not make for headlines news !!)
• Cyclicality of Industry sales –This is not the first time that the vehicle sales have turned negative. We have had similar issues in 2009, 2012 and 2013/2014. In fact, the drop was prolonged in 2013 and 2014
• Recovery time –the normal recovery time (from negative to positive sales) is a year. We are seeing a slump in 2019 and going by past history it may take at least one more quarter

India Motor Vehicle Sales from 2005 to 2019

• Growth in Absolute number of vehicles– In July 2005 the entire industry was selling 125k vehicles per month. By July 2018 this had grown to 440k vehicles in a month
• Volume versus value– While the graph shows only the increase in the volume of vehicles sold, the absolute value of vehicles sold has increased at a higher rate. Hence, the overall realizations have increased for the industry

Summary

The current industry scenario is indeed concerning and a combination of stimulus from the government (fiscal and monetary) and pro-active measures from the industry is vital. However, more than drop in retail sales, it also looks like the industry is bringing the production down to more realistic levels now in line with the actual demand. This will reduce the inventory at the dealer end and allow them to recover in the next few quarters.

We have high quality auto companies and their senior management who have seen such cycles in the past.  Though the noise we hear on slowdown this time is more than the past, we continue to remain bullish on India from a structural perspective.  As the history shows, these highs and lows are all part of the economic growth which happens in cycles.

Remember, the economy moves in cycles and it typically bounces back in few quarters.  This is not the first time, the auto sales are down in the last 15 years and it is not going to be the last time.  Historical data shows that cyclicality can’t be eliminated in many of the industries.

It is this period which is very testing for the investors.  The news we consume, the stories we hear and anecdotes we are told makes us believe that this is going to be permanent.  We, as investors have to sail through this tough times to enjoy the fruits of investing. In fact, in the same 15-year time period, despite three slowdowns, the market cap of India’s largest car manufacturer has grown 15 times!!