Is the Indian automobile industry witnessing a peak of its growth optimism?

Automakers are announcing a slew of price cuts across the industry as the industry witnesses a sluggish demand scenario. The passenger vehicle (PV) industry now has an all-time high inventory of 62-67 days.

As the industry is still struggling to get back to pre-pandemic sales and volume levels, the current change in demand dynamics adds worry to automakers. The recent push by the UP government has given some respite to hybrid car manufacturers. However, the larger outlook remains bleak, with monthly auto sales showing sluggish demand across the board. Is this signalling towards a peak in the automobile sector?

High unsold inventory

Despite the improvement in product availability and substantial discounts, the market sentiment remains muted. Extreme heat resulted in 15% fewer showroom walk-ins. The industry’s inventory stood at around ₹60,000 crore, lying unsold with dealers.

Manish Raj Singhania, President of the Federation of Automobile Dealers Association (FADA), said that “the total unsold inventory in the market would be around 600,000-650,000 units, and their average ticket size is ₹9.5 lakh. The last two months saw stock increase by 77,000 units.”

In June, total wholesale dispatches grew by 4% to reach 341,000 units. However, the actual vehicle registrations during the same month were 281,600 units, showing a gap between market demand and the vehicles supplied by the manufacturers.

Crunch in credit availability amid high interest rates

Banks are hesitant to take risks and are only interested in lending to quality customers with good CIBIL scores. Easy access to credit resulted in an explosion of demand for many consumer durable goods & services; now, with high interest rates and stringent norms coming into place, the demand could face some heat and, in turn, impact sales of vehicles.

Heavy discounts amid price competition in the industry

Retail car sales in India registered a year-on-year (Y-o-Y) drop of 6.7% in June 2024, the most significant dip in two and a half years. To revive demand in the industry, car makers have announced a slew of discounts. Even newly launched models, including SUVs, are being sold at a bargain as manufacturers and dealers look to clear unsold inventories.

Automobile majors Tata Motors and Mahindra & Mahindra (M&M) have substantially reduced the prices of their popular vehicles to revive demand. M&M has slashed prices by up to ₹2.05 lakh, while Tata Motors reduced prices by up to ₹70,000 on select models, along with benefits of up to ₹1.4 lakh on popular SUV variants.

M&M has announced special ex-showroom pricing for all the AX7 variants of their XUV700 SUV, effective four months starting July 10, 2024. The AX7 range now starts at ₹19.49 lakh, which is ₹2 lakh less than the earlier price of ₹21.54 lakh.

Tata Motors has also reduced the prices of its premium SUVs, Harrier and Safari, which currently start at ₹14.99 lakh and ₹15.49 lakh, respectively. Tata Motors has gone one step further by providing benefits of up to ₹1.4 lakh on popular SUV variants and discounts. For EV variants like Nexon EV and Punch EV, discounts range from ₹30,000 to ₹1.5 lakh.

Interestingly, these announcements have come a day after the Uttar Pradesh government waived registration fees on strong hybrid cars, effectively reducing their on-road prices by up to ₹4 lakh.

Overview of automobile (PV) stock performance over the past year

As the price war between automakers heats up, indicating a significant slump in demand. The slower growth in auto sales could result in lower earnings in the future. It is important to note that the NIFTY auto index (+63%) has been one of the top sectoral gainers in the last year amid high optimism around its growth and launch of new EVs.

Bottomline

As shares of auto-makers have seen a sharp rally in the last one year amid rising optimism around its growth, launch of new vehicles and rising EV adoption. However, the sluggish sales, significant price cuts and high inventory levels indicate a gloomy picture.