India Ratings and Research (Fitch Group): Auto Industry's Slowdown Continues amid Delayed Monsoon

India Ratings and Research (Fitch Group) has published the June 2019 edition of its credit news digest on India's auto sector. The report highlights the trends in the sub-segments of the auto sector, including passenger vehicles (PVs), commercial vehicles (CVs) and two-wheelers (2Ws), with a focus on sales volumes growth, market share movement, change in commodity prices and recent rating actions.

Domestic automobile industry's sales volume fell 12% yoy in June 2019 on weak consumer sentiments owing to the slowing economy amid delays in the onset of monsoons. With rising inventory levels at dealer level, most original equipment manufacturers (OEMs) continued to take production cut in June 2019. Over April-June 2019, the auto industry undertook a production cut of 11% yoy on account of around 12% yoy, 14% yoy and 10% yoy production cut in PV, CV and 2W segments, respectively. In the PV segment, production cuts for cars and UVs were 15% yoy and 2% yoy, respectively. Market leader Maruti Suzuki India Limited (Maruti) took a 15% yoy production cut following the slowdown in the auto industry to reduce inventory at the dealer level. The average inventory for PVs declined to 30-35 days in June from 35-40 days in May 2019. Contrary to industry-wide production cuts, Hyundai Motor India Ltd increased production by 3%, over April-June 2019.

In the CV industry, top two players – Tata Motors Ltd (TML) and Mahindra & Mahindra Limited ('IND AAA'/Stable) – underwent production cuts of 12% and 25%, respectively, due to high existing inventory levels. The average inventory for CVs increased to 55-60 days in June from 45-50 days in May 2019. Hero MotoCorp Ltd (Hero) cut production by 11% yoy and Honda Motorcycle & Scooter India Pvt Ltd took a substantial cut of 23% yoy over April-June 2019. 2W inventory at dealer level increased to 60-65 days in June 2019, up from 55-60 days in May 2019. Federation of Automobile Dealers Associations has requested the auto industry to bring down dealer inventory of 21 days by September 2019. Thus, further production cuts are likely to continue in July as well, given the existing high inventory levels.

PV sales volume declined 18% yoy in June 2019, driven by weak buying sentiment leading to the postponement of purchases. CV sales volume declined 12% yoy in June 2019 owing to decreased industry demand on account of tight liquidity conditions, especially amongst non-banking finance companies, revised axle load norms, and delayed purchases owing to weak customer sentiments. 2W sales also fell 12% yoy in June 2019 on increased insurance costs, higher interest rates and weak rural demand amid delayed monsoons.

Maruti's PV market share dropped to 51% in June 2019 from 53% in June 2018 on lower sales volumes. TML's CV market share dropped to 43% from 46% during the same period owing to continued weak industry demand. Bajaj Auto Limited continued to gain market share in motorcycles due to its aggressive price-cut strategy.