Auto slowdown severe, not seen in past two decades

Mayank Pareek, president, passenger vehicle business unit of Tata Motors, was candid when he was asked about reasons for the prolonged slowdown in the automotive market.

"This time the situation is different. Earlier there were just one or two factors responsible, but this time there are several," Pareek, who has seen 3-4 slowdowns during his about two decades in the industry, said.

Pareek's comments in May came as Tata Motors reported halving of its consolidated fourth-quarter net profit to Rs 1,108 crore.

Faced with an unprecedented slowdown, the original equipment makers are looking at the past for clues for a recovery.

However, the fact that this time the slowdown is different is making the situation tricky to gauge.

Now a 20-year analysis by research firm Edelweiss claims that the industry is in 'middle' of a downcycle. It says the current slowdown is different from the earlier ones on at least four counts – driven by domestic factors rather than global events, stiff competition from growing unorganised, pre-owned vehicle market, significantly higher margin pressure and prohibitive jump in vehicle costs.

The study says that historically global events such as the Asian currency crisis, dot-com bust and global financial crisis had triggered demand slowdowns. However, the current one is driven by domestic factors, including the NBFC crisis. The government in its latest Budget announcement has assured of helping the good NBFCs, which the OEMs keenly hope will turn around their fortunes in the short term. Pawan Goenka, managing director, Mahindra & Mahindra (M&M), said even if 10% of the customers get finance for vehicle purchase (who were earlier not getting it), it would help in reducing the slowdown by 10%. "It can turn out to be a masterstroke for short-term demand," Goenka told DNA Money, post the Budget announcement.

The second factor has been the sharp regulatory cost pressure: Over FY19-21, vehicle prices are estimated to jump 5-30% (they grew 1-2% per annum over the previous decade) due to safety, insurance and emission related compliance costs. The third important factor is stiff competition from growing organised pre-owned vehicle market. For instance, in passenger vehicles (PV) in FY19, the new vehicle market grew 2%, but the pre-owned market sustained double-digit growth. Lastly, even though volumes (till Q4FY19) have not corrected sharply, the Ebitda margin fall is higher than in the previous cycles.

As per the report, in the past over two decades, two-wheelers (2W), passenger vehicles (PV) and medium & heavy commercial vehicles (M&HCV) have gone through five-six cycles. It's pertinent to note that the pace of change in liquidity, as well as GDP growth, are key macro indicators that have consistently impacted auto sales across slowdowns and subsequent recoveries. Though slowdowns do not seem sharp on an annual basis, they are dotted with quarters wherein sales plummeted significantly. A segment-wise analysis reveals that slowdowns in 2W have been generally shorter and shallower than in PV and M&HCV which can be attributed to lower reliance on financing in 2W compared to the latter. Interestingly, there have been false volume recovery signals during slowdowns, which fizzled out due to lack of liquidity and GDP support; and the previous 2W and PV recovery cycle was tepid.

Volume recovery is unlikely to be as sharp as in the past unless there is strong fiscal support, the report said. The sales recovery, if at all, in H2FY20 is likely to be optical as well as short-lived, it said.

There have been similar false recovery signals in the past: During FY12-14, PV sales were flat (versus 9% 10-year CAGR). However, a deep dive analysis indicates that during Q4FY12-Q3FY13 vehicle sales grew 10%. As the sharp volume recovery was not supported by specific macro parameters, it quickly fizzled out.

"We saw a similar trend during FY08-09 in 2W. Average growth during the two years was -2.8% (versus 10% 10-year CAGR). However, during Q1FY09-Q2FY09 average sales jumped 12% despite muted macro data. As a result, demand failed to sustain. M&HCV also saw false recovery signals during Q3FY08-Q1FY09. Volumes grew an average 4% during the period versus an average decline of 12% during the previous two quarters", the report said.

Sridhar V, partner, Grant Thornton India LLP, said this time the slowdown has been due to various domestic issues like an increase of axle load for commercial vehicles, absence of a scrappage policy, trouble around NBFCs leading to funding constraints, tightening of consumer spending, decrease in rural demand due to slackening of monsoon and price volatility.