Bumpy road: Why is India facing a major auto slump right now?

Rs 77,800 crore! That is the worth of the cars lying in the warehouses right now. Yes, you read it right. All is not well in the car market and here’s what’s troubling dealers.

The Indian auto industry is currently witnessing a major slump in its sales as it’s stung by piled-up inventory and uncertainty on consumer demand. The situation is pretty grim as lakhs of vehicles are still lying in the warehouse even with the advent of the festive season (the period of peak sales across sectors). 

To overcome this uncertainty, car makers have also announced lucrative discounts and promotional offers on their models to increase sales, but the sales still remained low.

Here’s a summary of automobile sales in India in August 2024 vs a year ago:

_{Courtesy: Company data. Note: These details are shared for understanding and educational purposes only.} 

Is the slump a cause of concern?

Yes. Federation of Automobile Dealers Associations (FADA), the apex national body of Automobile Retail Industry in India, in its August 2024 report of vehicle retail data, highlighted that even with the arrival of the festive season, the market remains under significant strain due to delayed purchases, poor consumer sentiment, and persistent heavy rains.

As per the report, the sharpest drop was seen in commercial vehicles because of weather-related disruptions and weak industrial demand, followed by a decline in passenger vehicles.

Rs 77,800-crore worth!

FADA, in its report, gave a shocking revelation on the reality of the leftover inventory. It said that the slump has reached “alarming levels,” with stock days now stretching to 70-75 days and inventory totaling 7.8 lakh vehicles, valued at a staggering Rs.77,800 crore. “Rather than responding to the situation, PV OEMs (vehicle manufacturers) continue to increase dispatches to dealers on a MoM basis, further exacerbating the issue,” the industry body has alleged. 

Factors affecting auto sales:

While FADA’s report spells out a worrisome trend, the pattern of demand and sale is imperative to understand. This is not the first such phenomenon. 

A cyclical structure: One of the primary reasons for a slump is the cyclical nature of auto sales, which means that growth and decline in demand for cars over time are led by economic and weather conditions, consumer sentiment and more. 

In the current scenario, FADA points out that low market sentiments coupled with excessive rainfall in September that can weaken rural purchasing power, Shraddh Period among Hindus is expected to pause PV sales. However, the sales can go uptick in near term as festive season presents promising growth opportunities. Strategic inventory management and targeted marketing efforts will be key to capitalising on the festive period, FADA adds. 

Waiting for more discounts: When car makers and dealerships offer high discounts and price cuts to clear stock, especially during the festive season, consumers tend to postpone their buying decisions and instead wait in anticipation of prices falling further.. For instance, auto sales during the festival season saw the highest-ever numbers in 2023, scaling 3.793 million units, up 19% over the 3.195 million units.

Weather anomalies: Heatwaves in the summer months and heavy rains thereafter hurt showroom visits and delayed purchase decisions. For instance, in July 2021, there was a 7-8% dip in monthly car sales compared to pre-monsoon months due to rain and road conditions​.

Low demand for earlier models: Several new launches, facelifts, and upgrades of earlier car models are leading to a low demand for the older models which are piling up in the warehouse. This is one reason why dealers are struggling to sell entry-level hatchbacks, sedans, and some older SUV models.

Impact on auto stocks

When there is a slowdown in auto sales in India, it has a direct impact on the performance of auto stocks. When sales dip, the company’s quarterly revenue and profits drop, leading to negative investor sentiment. 

For example, when India’s auto industry witnessed a sales slump in 2019 due to liquidity issues, weak consumer sentiment, and high insurance costs, auto stocks like Maruti Suzuki and Tata Motors fell by around 15-25% over a year.

However, there is always a silver lining. The fall in stock prices can indicate buying in the stock market before the shares hit the neutral gear. (Yes, enough with automobile puns!)

If you are interested to know more about auto stocks and whether it is worth investing in, you can check out some smallcases.

Disclosure for the above-mentioned smallcase.