What’s Driving New Car Sales Down?
Sometimes what you see with your naked eyes isn’t the truth. You have to dwell deeper to know the reality. Especially, if you are a stock market investor.
For instance, the graph below doesn’t tell you anything about the gloom in the auto sector, although it hints at sluggishness.
Stagnation in new car sales?
Financial Year (FY) 2018-19 was a challenging one for automobile manufacturers in India. Car sales grew at a mere 2.8% in FY 2018-19—the slowest growth clocked since FY 2013-14.
While many observers are terming the on-going slack as just a cyclical speed bump in the journey of automakers, a detailed study paints a completely different picture.
Story of Indian cars market in detail…
Monthly sales data of new cars (from automakers to dealers) is a common reference point for investors and auto market observers to gauge the robustness of activity in the sector. From the beginning of 2019, the Passenger Vehicle (PV) segment has witnessed negative growth for 3 consecutive months—January, February and March.
That said, this data is quite volatile and thus doesn’t help much in identifying trends.
But when used in conjunction with a smoothened-out average for various periods such as 12-month or 24-month among others, monthly sales data can generate strong signals.
This doesn’t mean, you should buy or sell an auto stock based on this, but if you think fundamentals drive stock prices, then knowing these trends is a must for you.
Slack in PV sales is alarming…
Monthly growth in PV sales considers growth in a particular month vis-à-vis growth in the same month last year. For example, growth for March 2019 is with respect to growth in March 2018 and so on.
12-month average PV sales growth is a 12-month average of monthly sales growth on a Y-0-Y basis. For example, the number for March 19 is the average of monthly growth for the period between April 2018 and March 2019. Here, monthly growth is calculated as suggested above.
Some interesting observations:
- 12-month average of monthly growth in PV sales reached a 50-month low in March 2019.
- In the last 120 months (i.e. in 10 years) only 34 months have recorded the observation of below 4% growth (12-month average) PV sales.
- In the past 10 years, when 12-month average growth in monthly sales dropped below 4% from higher levels for consecutive 4 months, it eventually slipped into negative territory.
- The maximum negative growth witnessed on the aforesaid indicator has been 8.7%. Going by this, sub 4% growth on this indicator becomes a red flag for the domestic auto industry.
- On the other hand, there have been 54 instances wherein monthly PV sales recorded a sub 4% growth. In other words, while monthly sales numbers is one of the most sought after datum, it’s not as reliable an indicator as 12-month average of monthly growth in PV sales.
Now let’s go back to basics and check what factors have been driving the auto sales numbers (up or down).
Traditional indicators to gauge the trends in the PV market are…
- Trends in discretionary income
- Interest rates
- Fuel prices
As discretionary incomes go up, auto sector benefits immensely. Moreover, inflation, interest rates and fuel prices also affect auto sales numbers. Higher inflation and higher fuel prices drag the demand and vice-a-versa.
Between April 2012 and April 2014, India’s retail inflation averaged 9.5% and Brent crude oil prices in the international markets averaged USD 108.8 per barrel. These headwinds affected car sales in FY 2012-13 and FY 2013-14. Coincidently, in April 2012, the12-month average of monthly growth in PV sales dropped below 4% for the first time after September 2001.
But latest trends are a little confusing.
Despite benign inflation, low-interest rates and relatively stable crude oil prices, the car sales numbers have been lacklustre of late.
Tax collections from individual taxpayers are going up and more people are now filing tax returns. According to the finance ministry, nearly 85.5 lakh new returns were filed in FY 2016-17 and close to 99.5 lakh in 2017-18.
Budget 2019 has effectively exempted the gross income of individuals upto Rs 6.5 lakh from the levy of income tax. Moreover, the 7th Pay Commissions will place higher discretionary income in the hands of nearly 1.1 crore central government employees.
All these factors have failed to translate into higher sales.
Higher base effect?
That could be one of the reasons but certainly not the only reason.
Are car market dynamics changing?
Factors causing disruption in the automobile market:
- Proliferation of app-based shared mobility platforms
- Development of an organised market for pre-owned cars
- Emergence of innovative business models challenging new car ownership
Once upon a time, car ownership was considered to be a status symbol.
But as times changed, preferences changed too.
Over the past few years, app-based shared mobility platforms such as Ola and Uber gained popularity in the top 8-10 cities due to factors such as traffic congestion in metro cities and affordability among others. This in turn, affected the car ownership decisions of people living in urban areas.
Some car manufacturers initially thought shared mobility platforms were opportunities to shore up sales. They didn’t perceive the proliferation of Uber and Ola as competition. Some of India’s leading automakers derived as much as 10%-15% of their sales from cab aggregators.
However, this trend changed lately.
Automakers saw a bump in their sales to aggregators when app-based shared mobility platforms were spreading their network like wildfire in metros. Initially, their compensation structure to cabbies was extremely lucrative so much so that, many empanelling with these shared mobility platforms became the most sought after profession.
After the initial excitement, the fever receded as a number of factors including the intensifying competition affected the compensation structure of cabbies.
As per industry experts, app-based shared mobility platforms failed to replicate their success in the top-10 cities in smaller towns. As the fleet demand from these platforms slackened in metros, the automakers felt the heat.
Thriving pre-owned car market
According to media reports, the sale of pre-owned cars in India has been surpassing the sales of new cars for the last few years. In the developed markets, this ratio has been 1:3; i.e. for every new car sold, 3 used-cars get sold.
Historically, the unorganised market has dominated used-car sales. Organised platforms constitute only 17% of the total market for pre-owned cars in India.
Selling a car in the pre-owned segment has always been a cumbersome and time-consuming process, but with the emergence of players in the organised sector, this segment is poised to grow steadily in future, so is the market share of organised players in the pre-owned cars market.
According to Cars24, one of India’s largest pre-owned car-buying platforms, the ownership period has fallen from 5-6 years to 4 years for mass-market cars and below 3 years for the premium segment. Moreover, buying a second-hand car doesn’t affect the esteem of car buyers anymore.
Aggressive launches by some of the largest automakers in India, over the past few years, may ensure that, there’s an adequate supply of vehicles in the pre-owned segments in the coming years.
Aspirant buyers who want to migrate from two-wheelers to four-wheelers or those who want to migrate from mass market four-wheelers to premium segments might keep the organised players of the pre-owned car market busy.
Subscription-based car platforms
If the shared-mobility platforms disrupted the auto market in last4-5 years, you might expect the déjà vu moment with emergence of subscription-based car platforms. According to the co-founder of Zoomcar, a subscription-based self-drive car rental platform, an average down payment for a car purchase is Rs 2 lakh in India. But subscription-based car rental platforms offer the flexibility of paying a subscription fee which is inclusive of maintenance, insurance, servicing costs. Subscription fees can be further economized by opting for the sharing option when your car is idle.
It seems automakers will have to adopt models that are popular in western countries to increase their sales in India.
The crux of the auto story…
Consumer preferences are changing fast. Today’s car buyer is much younger, more flexible (who’s ready to experiment), intelligent, tech-savvy, yet price-cautious. While the auto industry still remains cyclical in nature, the traditional matrix to gauge its performance might fail you, if you rely on it excessively.
Plus, auto sales numbers would be affected by engineering disruptions such as EVs and autonomous driving. Regulatory changes are likely to make cars more expensive in the years to come.
Meeting performance expectations of consumers at their desired price points is the key challenge for carmakers.
The co-relation between new car sales and pre-owned car purchases, new car launches, smoothened trends in monthly sales of new cars and emergence of new business models challenging the ownership aspirations among others will be better indicators to evaluate the performance of Indian automakers.
Like share buybacks, will auto manufacturers introduce innovative car buyback programmes (to enter the pre-owned car market, if that’s really lucrative indeed) is the question now.
Next time, when somebody tells you to invest in an auto stock narrating India’s GDP story, don’t take that argument on its face value. The business of automakers is undergoing a sea change for sure!
As Peter Lynch cites, Behind every stock there is a company.
Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. The information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.