Automobile sales improving in February, full recovery may take time

Bharat Stage-IV inventory.

"Our interactions with leading channel partners indicate continued weak retail in urban markets while rural demand is better off due to positive agri sentiments. In commercial vehicles (CVs), financiers are resisting to fund BS-IV vehicles thus impacting ongoing pre-buy,” brokerage Prabhudas Lilladher said in a report.

Meanwhile, due to the coronavirus outbreak, a shortage in supply of components such as alloy wheels, sensors and plastic parts is expected to impact production in the next 2-3 months.

“Supply disruptions due to coronavirus is expected to be more profound from March and likely to continue in Q1FY21, even though OEMs are considering alternate sources,” the brokerage added.

Passenger vehicle sales are expected to drop marginally by around 3 percent YoY in February 2020.

“While the sales would drop, the pace of decline would be substantially lower than 15 percent drop in YTD FY20 and 5 percent drop reported in January 2020. Inventory of passenger vehicle players have reached comfortable levels of about three weeks as compared to the industry norm of about four weeks," an analyst at brokerage Sharekhan said.

Weak demand in CV segment is expected to continue the trend of double-digit fall in February 2020 as analysts expect a 10 percent decline in sales.

However, the decline is likely to be much lower than the drop of 22 percent reported in April 2019 to January 2020 period and 16 percent drop in January 2020.

Meanwhile, inventory levels of CV players have normalised and currently stand at about four weeks.

"CV players have not started BS-VI vehicle production yet and continue with BS-IV vehicles. CV players would stop production of chassis vehicles by end of February 2020 while the fully built vehicles would continue to be produced in the month of March 2020,” according to Sharekhan.

Two-wheeler sales are likely to drop by 13 percent in February 2020 led by lower dispatches by the OEMs for BS-IV models along with muted demand environment. Dealers across the OEMs are offering higher discounts of Rs 3,000 to 6,000 per unit in key markets based on the demand in their specific region.

Two-wheeler players are now majorly to producing BS-VI vehicles with BS-IV production being minimal. Companies have stated that they would completely stop producing BS-IV vehicles by end of February 2020. Inventory levels for two-wheeler players currently stand at about four weeks.

Tractor volumes are expected to rise by 7 percent in February 2020 led by better crop output, adequate reservoir levels and better farm realizations.

Analysts at Prabhudas Lilladher noted that the demand for 40-50 HP tractor grew by 10-15 percent YoY in H2FY20 due to higher usage of implements and increased commercial usage.

Inventory level has reduced to around 25-30 days as compared to 30-35 days earlier. Discounts in the segment also continued to remain at a higher-end coupled with varied offers.

The Nifty Auto index has gained 6 percent in the past six months after improved volume performance, which is broadly in line with the 8 percent gain in the benchmark Nifty.

Brokerage Sharekhan expects a gradual improvement in the volumes and a sustained recovery from H2FY21 post-transition to BS-VI norms and improvement in the economy.