Auto Sector to face prolonged sales slump

January 3, 2020 (MLN): Auto Sector’s sale is expected to decline in December 2019 amid lower volumes in the aftermath of higher prices and interest rate.

A research report by JS global forecasts that auto sales for Dec 2019 are expected to decline by 42%YoY to around 11,300 units, which would be the lowest monthly sales for a December month since 2014 i.e. roughly at the start of the previous growth cycle. In addition, volumes are expected to remain downbeat.

Company-wise, Indus Motors (INDU) and Honda Atlas (HCAR) are likely to face yet another month of cut in volumes, with declines of 57% YoY and 58% YoY respectively, the report highlighted.

Alto is expected to redeem Pak Suzuki (PSMC)’s losses by limiting the overall reduction in unit sales to 32% YoY for the automaker.

Report further forecasts that Millat Tractors (MTL) could see a 3x increase in sales, which is likely due to low base effect, considering that their plant remained inoperative last year during this time.

As auto industry is experiencing prolonged decline in sales and volumes, the recent increase in prices by Original Equipment Manufacturers (OEMs) seem slightly surprising to say least, the report added.

The report underscored that the recent increase in prices by automakers is unjustifiable given the state of the volume at present, as with sufficiently higher margins, it is abysmal to see a price increase. The only possible logic could be higher expected demand in January and a view to pass on cost impacts all in one go with a period of stable prices later (assuming a stagnant rupee).

To recall, recently, Indus Motor Company raised the prices of its 1.3 Corolla Variants by Rs. 20,000. Previously, Pak Suzuki Motor (PSMC) had also raised the prices of some variants in a quest to mitigate its losses. However, in case of PSMC, the rise in price is justifiable as its margins had fallen to unsustainable levels (the company incurred four consecutive quarterly losses).

Nevertheless, the decline in auto sale amid lower volume might be a warning of worst time ahead for the auto sector.

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