February sales data from domestic auto companies reaffirms the sector’s battle against multiple headwinds. Supply chain disruption due to coronavirus outbreak that has already impacted production and sales of some auto makers, threatens to wreak havoc in the transition to BS-VI emission norms from 1 April.
Add to this, liquidity crunch, weak economic activity and the challenge for auto firms to trim BS-IV inventory, while gradually moving towards the BS VI norms.
From passenger cars and utility vehicles (UV) to two-wheelers and commercial vehicles (CV), February wholesales continue to decline both on a year-on-year (yoy) and month-on-month (mom) basis. Emkay Global Financial Services Ltd, in its forecast for February, said, “wholesales are expected to be under pressure in CVs, 2Ws and passenger vehicles, due to inventory correction by dealers before the BS6 transition.”
The pain was relatively less in passenger vehicles where the sales declined in single-digits. February sales of market leader Maruti Suzuki India Ltd (MSIL) and second largest Hyundai Motor India Ltd fell by 1% and 7%, respectively, in domestic markets. Analysts say these firms started transitioning to BS VI several months ago.
Mahindra and Mahindra Ltd, whose auto sales veered off by a huge 42% surprised negatively. The biggest disappointment was the drop in utility vehicle sales, even when competitor Maruti managed to pull off a decent 3.5% yoy growth in February.
Mahindra’s management attributed the sales drop to component supply disruption from China that effected billing for the month.
Meanwhile, in the unlisted domain, Honda Cars India Ltd’s sales fell 46% yoy. “We have been supplying only BS6 cars from January onwards and dealers were aggressively iquidating their BS4 stock,” says Rajesh Goel, senior vice president and director of the company.
However, CVs continue to be the worst-hit. Both Tata Motors Ltd and Ashok Leyland Ltd failed to pep up the sentiment in the CV segment. Overall CV sales in February fell by about 25-35% led by sharp contraction of around 45-47% in medium and heavy CVs.
Both companies and auto dealers are keen on exhausting the BS-IV inventory pipeline before replenishing it with the new BS-VI ones. Meanwhile, companies have migrated to production of only BS6 vehicles, which is indicated in lower production volumes. But manufacturers say that this is because of BS6 migration and efforts to dispense BS4 stocks as per plan.
More worrisome is the supply disruptions due to the coronavirus outbreak in China. This could have some impact on technology transition and may be critical to sales and production growth in the next three months.
As such Hero Motocorp Ltd had stated a 10% disruption on account of supply issues led by lockdown in China. Although the company’s sales numbers were not released (at the time of print), both Bajaj Auto Ltd and TVS Motor Company Ltd disappointed the Street, with double-digit drop in sales.
As these host of factors continue to roil the sales prospects in the near term, investors would have to deal with volatility in stock prices of auto companies. Little wonder then that the Nifty Auto fell 17% since 1 January, when news of the deadly coronavirus epidemic broke out.
