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Corporate Dec 24, 2012

Only excise cut, removal of fuel price anomaly can boost car sales

By Sindhu Bhattacharya

New Delhi: This year Indians who wanted to buy a car or a motorcycle dithered for multiple reasons. Inability to afford the vehicle of their choice, increasing cost of ownership and indecision over whether to buy a petrol or a diesel car.

Many bought nothing at all eventually as auto loan rates remained high and the overall economy showed little signs of improvement.

Festival cheer kept sales from sliding into the negative territory again in October . AFP

But this reluctance was typical of first time car buyers or those wanting to buy small cars, since the momentum for diesel driven SUVs and large cars was not impacted at all! As the year progressed, disappointed car makers stepped up discounts across most brands-not just for petrol cars but also on some diesel ones. Now, even some top motorcycle brands carry discounts.

The positive momentum for SUVs and large diesel powered cars helped overall growth numbers but not by much since 7 out of 10 car buyers still go for small cars and it was here that sales were impacted the most.

Not just within the country, vehicle makers also suffered on the export front this year when the European market remained subdued and neighbouring ones like Sri Lanka imposed exorbitant duties on vehicle imports and assembly from India. These measures affected companies such as Maruti Suzuki India (exports to Sri Lanka down 50 percent), Bajaj Auto primarily.

As per data released by the Society of Indian Automobile Manufacturers (SIAM), domestic car sales and production growth were both negative in November. In calendar 2012, August was the first month when domestic passenger car growth turned negative at -18.5 percent, followed by -5.36 percent in September.

Festival cheer kept sales from sliding into the negative territory again in October but things are back to being difficult in November. And December could possibly be worse.

SIAM data showed car production growth was almost stagnant between April and November at 15,91,911 units (15,75,777 units) when domestic sales were also flat at 12,40,688 units (12,25,053 units). But exports surged almost 8 percent at 356,791 units (330,936 units). Production of bikes was down 1.18 percent to 79,40,684 units (80,35,816 units) when sales were flat at 67,74,230 units (67,54,675 units). Exports of bikes were down almost 4 percent during this period to 12,47,813 units (12,97,779 units).

But production of UVs rose over 62 percent to 364,048 units (224,577 units) between April and November when their sales also kept pace at almost 62% growth to 357,872 units (221,327 units). The other bright spot was sales of varimatic scooters. Production of these scooters rose close to 20 percent as did sales at 19,45,866 units (16,20,731 units).

UVs and scooters account for just about 20 percent of the passenger vehicle and two-wheeler market, respectively. So the spurt in their sales is helping only a fifth of their respective market segments.

A SIAM official said bike sales are being impacted now because the slowdown and muted market sentiment has now reached the rural markets as well -till now it was largely an urban phenomenon. Car and two-wheeler debacle may force SIAM to once again revise its forecast for 2012-13 downward, the third time in one year.

Maruti's Chairman R C Bhargava says unless the government reduces excise duties on vehicles and removes uncertainties over diesel vs petrol fuel pricing, the overall domestic car market may not touch double-digit growth even in 2013-14.

This fiscal, his prediction for passenger car domestic growth is about 6 percent and he says the same level may be seen in the next fiscal too.

No wonder then that car makers are offering never-before discounts to get buyers.

The Tata Aria is now available for an unbelievable Rs 2.5 lakh less-the base version comes for just about Rs 10 lakh (ex-showroom before discount). In a sense, the car can be yours at just 3/4th its ex-showroom price!

Honda Accord 2.4 AT is available for Rs 2.5 lakh less, Fiat Linea 1.4 at over Rs 72,000 discount. Maruti SX4 carries a company discount of Rs 50,000 which is sweetened further by dealers struggling to reduce stocks; discounts on most other Maruti models range between Rs 16,000-Rs 55,000.

Similar discounts are available from Hyundai and most other car companies.

But even discounts have not worked most cases. Sample this: Indians bought almost 2.4 million more bikes and scooters in 2010-11 over 2009-10; and 1.67 million more the next year in 2011-12 over 2010-11.

But between April and November this year (2012-13), the incremental two-wheeler buyers were just about 360,000 as per SIAM.

This clearly shows that economic slowdown and consequent lack of buying power has begun to impact the bottom of the customer pyramid - rural customers. In this entire slowdown story, the low levels of penetration of cars and even two wheelers do not seem to matter much.

According to a report by Elara Capital's Mohan Lal and Pooja Sharma this morning, only 52 million households in India have a two-wheeler and another 12 million own any king of four-wheeler but an overwhelming 73 million households do not own any vehicle whereas 111 million households have to make do with just bicycles. This report says two-wheeler penetration in India is just 21 percent which means there is immense scope for two wheeler sales to grow. The story is similar for car ownership.

So the vast unfulfilled gap for vehicles means the India growth story in automobiles remains intact in the long term. It is the short-term triggers which are missing.

Another brokerage house, Ambit Capital, says passenger vehicle industry volumes are expected to grow at a healthy CAGR of 12.5 percent over FY13-15.

If the long-term story is intact, perhaps the policy needs to encourage production and sales of vehicles in the domestic market. This means easing up the vehicle finance market and loan rates, reducing excise duty on cars and most importantly clarifying its stand on diesel pricing.

As of now, there is no clear roadmap for diesel fuel pricing going forward and the government is once again examining suggestions on whether to impose a stiff annual penalty on large diesel cars.

For two-wheelers, adequate steps on the financing front should do the trick.

by Sindhu Bhattacharya

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