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28
November 2016
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Vehicle (The Total Investment & Insurance
Solutions)
In the wake of demonetisation, vehicle
bookings have dropped 30%-50% in urban areas and about 60% in rural areas. The
real impact of demonetisation on automobile sector will be visible in December
and could last till fourth (March) quarter of FY17. Recovery depends on how
fast liquidity is infused back into the economy and on how soon the industry
and consumers adapt to higher non-cash transactions, says a research report. The Total Investment & Insurance
Solutions
Religare Capital Markets Ltd hosted a
conference call with the Federation of Automobile Dealers Association (FADA) to
discuss the impact of demonetisation on India’s automobile industry. John K
Paul, President, and Nikunj Sanghi, Director for International Affairs &
Global Relations, represented FADA during the conference call. The Total Investment & Insurance
Solutions
Following the call, Religare says, while the
immediate impact (of demonetisation) is evident, uncertainty looms over the
pace of recovery in the medium term. "As India is in a transition phase of
adapting to the effects of demonetisation, discretionary spending on passenger
vehicles (PVs) could see a longer slowdown than two-wheelers. The impact on
commercial vehicles (CVs) is linked with freight movement and rates and hence
will be in sync with economic growth," the report says.
Inventory
piling up
During the conference call, it was
highlighted that inventories with automobile dealers are piling up. As per the
discussions, lower retails have led to a higher inventory levels across
dealers, at 45-60 days from normal level of around 30 days while the cash
crunch has fuelled about 30% revenue drop even for repairs and services. FADA
is requesting manufacturers and financial institutions to increase the credit
period for dealers. It also expects manufacturers to reduce production and
dealers to offer higher discounts towards the year-end to clear stocks. The Total Investment & Insurance
Solutions
CVs
and premium PVs to bear the brunt
As per FADA, sales of commercial vehicles
-CV- will be affected the most, followed by two-wheelers and passenger vehicles
-PV. Entry-level PVs could be the least affected as a higher proportion of
sales in this segment is to the salaried class and government employees. The
fear psychosis of increased government scrutiny on high-value transactions is
likely to dent demand for premium PVs in the near term, Religare says. The Total Investment & Insurance
Solutions
Recovery
most resilient in two-wheelers
A revival in segments with high cash sales
such as two-wheelers in rural areas will be contingent on the pace of liquidity
infusion back into the economy. However, Religare says, with two-wheelers being
considered a transportation necessity in most areas (except tier-1 cities),
recovery should be most resilient for this segment once the economy returns to
normal. The Total Investment &
Insurance Solutions
FADA, however, believes the trends of
‘scooterisation’ (regarded as a women-friendly family vehicle) and
‘premiumisation’ (especially for Royal Enfield) will remain unaltered in the
near term.
Talking about effects of demonetisation
across the regions, Religare sees South India to be more resilient. It says,
"Of all the regions, FADA expects the south to be the most resilient given
high literacy levels and familiarity with banking channels, followed by western
markets. The northern and eastern regions could lag due to their higher dependence
on cash transactions." The Total
Investment & Insurance Solutions
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