Auto sales in June a far cry from recovery; hope for tractors, two-wheelers

KEY HIGHLIGHTS

• Tractors, two-wheelers lead recovery but passenger vehicles offtake remains sluggish
• Clear indication of pent up rural demand; distress higher in urban pockets
• Progress of monsoon crucial for growth in next few months
• Industry still looking at a high double-digit decline in fiscal 2021

Sale of automobiles was expected to give clear signals of any real green shoots in the domestic economy and if the figures for June are anything to go by, it is a split verdict.

In the first full month after lockdown restrictions were lifted in mid-May and economic activity was allowed across the country, two-wheelers and tractors were the two segments showing the most optimistic trends. The numbers released by the industry on Wednesday are wholesale that represent vehicles produced at the factories and shipped to dealerships. While retail sales give a clearer indication of actual demand and offtake on the ground, this data gives an idea of what is to follow.

Following a bumper rabi crop and expectations of a normal monsoon that is already underway, sale of tractors posted a healthy double-digit growth. Mahindra and Mahindra, the market leader, sold 35,844 units, a 12.4 per cent growth over June 2019. Escorts also reported a near 23 per cent jump at 10,851 units.

"This is our second highest June sales ever. The timely arrival of the south west monsoon, combined benefits of a record rabi crop, government support for agri initiatives and very good progress in the sowing of the kharif crop have led to positive sentiments among farmers," said Hemant Sikka, President - Farm Equipment Sector, Mahindra & Mahindra Ltd. "These underlying factors along with better cash flows in rural markets have helped boost tractor demand during June. It is expected that this demand will continue to remain buoyant in the coming months."

Two-wheelers that form the biggest segment of the domestic industry in terms of volumes, also benefitted from the seemingly robust demand in rural India. Country's largest two-wheeler maker Hero MotoCorp dispatched over 450,000 units to its dealerships during the month. This was nearly 27 per cent lower than the tally in June 2019, but more than 90 per cent of the tally in February, the last pre-COVID month.

TVS Motor Company also mirrored this trend with overall sales at 198,387 units, 33.23 per cent lower than June last year, but more than 84 per cent of February's tally. Country's largest scooter maker Honda Motorcycle and Scooter India was relatively a laggard with a near 56 per cent drop in sales at 210,879 units. Honda's sales were a shade over 60 per cent of its February tally reinforcing the theory of sluggish demand in urban centres. Scooters in India are predominantly sold in cities.

"We have demonstrated phenomenal leadership quality and tenacity to clock a sharp vertical growth in our sales at a time of massive disruption and uncertainty. Sales of over 4.5 lakh two-wheelers in a highly disrupted month is also a clear signal of the resilience of the Indian economy to be able to revive in the face of any adversity. This has vindicated our strong belief in the robust fundamentals of the Indian economy," said Dr Pawan Munjal, Chairman & CEO, Hero MotoCorp. "A major part of the market demand is emanating from the rural and semi-urban markets, which have been helped to a large extent by the various stimulus packages rolled out by the government. A combination of multiple factors, including the forecast of a normal monsoon, a bumper rabi crop and the upcoming festive season are expected to keep the momentum going over the next few months."

Sales were significantly weaker in the passenger vehicle segment. Market leader Maruti Suzuki reported a 54 per cent decline, Hyundai was down 49 per cent, Mahindra by 57 per cent, Ford at 50.5 per cent, Toyota at 63.5 per cent, and Honda down by 86.45 per cent. Overall the segment recorded a decline of 48.2 per cent. Only Tata Motors and Renault bucked the trend with a decline of less than 15 per cent.

"The COVID-19 lockdown deeply impacted PV industry sales in Q1FY21. After partial sales recovery in May'20, pent up demand supported a steeper recovery of retail in June'20," said Shailesh Chandra, President, Passenger Vehicles Business Unit, Tata Motors Ltd. "Passenger Vehicle Business cumulatively sold 14,571 units in Q1 FY21, which was 61 per cent lower than Q1 FY20. Retail was stronger than wholesales by 27 per cent, driven by the company's focus on retail while ensuring optimum inventory levels in the network."

More ominously, unlike two-wheelers, sales are far off the pre-COVID February tally. Maruti dispatched less than 40 per cent of the cars in June compared to what it had shipped in February. For Hyundai, it was slightly better at 53 per cent. The industry average is under 50 per cent.

"Post COVID, the market has been showing a shift towards entry-level suffix in all products that we sell and we are monitoring such trends and adjusting our future production according to market demand," said Naveen Soni, Senior Vice President, Sales & Service, Toyota Kirloskar Motor Ltd. "Our production side has been helping us ramp up production to be able to meet customer requirements. Going forward, we would like to focus on ramping up production while placing the highest priority to the safety and well-being of all stakeholders and by adopting the 'Safety and Health First' approach at all times."

Experts say not too much should be read into these figures as there are too many uncertainties in the market.

"Factories are still opening up. So are the dealerships. The whole system had come to a halt so it will take a few months for it to stabilise," says Puneet Gupta, Associate Director, IHS Markit. "We will know the real picture somewhere in September."

With India's GDP projected to contract by 4.5 per cent in fiscal 2020-21, it will have a significant bearing on the automobile industry. Even in the best case scenario of a quick recovery, sales would decline in high double digits.

"The baseline for decline would be 35 per cent. If there is a stimulus package or a quick demand recovery then the decline would be less. At the same time, it could also be much worse at nearly 50 per cent in the worst case scenario," says Vinay Piparsania, consultant, Counterpoint Research. "These are wholesale numbers and should be taken with caution. The real situation will be depicted by retail numbers. Looking at where we are today, if by the end of the year we are able to restrict the losses to 30-35 per cent, I would say the industry has performed on expected lines. It is still too early to predict whether it will do better or worse."

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