India’s Auto Sector Update
In this article, we will see why Auto Sector Companies stocks are going down. Why almost all the Auto Sector Companies‘ stocks are trading below 30%-35%? What are the reasons behind this decline? There are main 4-5 reasons for the same. Lets discuss these reasons in detail.
5 Key Reasons : Why Auto Companies’ Stocks Are Going Down?
1.Liquidity Crisis :
- Because of IL&FS problem, it is going difficult for the Non-Banking Financial Companies (NBFCs) to raise the money. Due to which these NBFCs are not able to execute the lending as aggressively as they want. For example, the NBFC which was raising the funds from the market at 7%-8% earlier, have to pay 10%-10.5% interest for the same amount of fund raising. So in such situation, how these NBFCs can lend money to other retail customers (who will be taking loans from these NBFCs) at the comparative lower or discounted interest rates. This overall scenario is called as “Liquidity Crisis”. This liquidity crisis in NBFCs is impacting the auto sector very badly.
- But this is not the situation in case of Banks. On the other hand, Banks (especially PSU Banks) are having the clear mandates in which they are suggested to focus more on the retail loans than the corporate loans.
- In case of Retail loans, there are 2 main important types of loans –
- Home Loan & Vehicle Loan. Thus, PSU banks are having availability of cash ( ie. having more liquidity) with them as compared to NBFCs.
- Still the aggressiveness in the business can be seen in the NBFCs rather than PSU banks like SBI, Bank of India, Punjab National Bank, Union Bank of India, Bank of Baroda etc. These PSU banks are not having that high level of aggressive business strategies like NBFCs.
- But, in the intension of high business growth, there is a lot of pushing in case of NBFCs. Thus, because of liquidity crisis for NBFCs, lot of problems have arisen in loans disbursement process, impacting the sales badly.
- Thus, Liquidity is the foremost reason which has come into the light after IL&FS troubles.
2.Strict Emission Norms (Migration to Bharat Stage VI Norms) :
What Are Bharat Stage VI Norms?
- Bharat Stage (BS) VI Norms have been implemented from 1st April, 2019. The Bharat Stage are standards instituted by the government to regulate emission of air pollutants from motor vehicles.
- Bharat Stage VI (BS VI) is an emission standard that will bring much-needed changes in the Indian automobile industry in terms of pollutant emissions. With this emission norm coming into effect, India will come at par with the US, European countries and other advanced automotive markets across the globe.
- India is currently following BS IV norms that were adopted this year across the country.
Impact of BHARAT STAGE VI NORMS
- Compliance with BS-VI norms will require higher investment in technology to upgrade vehicles in stock and making new vehicles. This will also mean fewer launches till the deadline. Those who buy Bharat Stage VI-compliant vehicles will have to pay more since such vehicles will cost automakers more and they will pass on the additional cost to the buyers. The Bharat Stage VI-compliant fuel too will be more expensive.
- As a result of the same, Maruti Suzuki has announced that they are going to stop manufacturing the diesel variant cars from 1st April, 2020. Almost 30% volume of Maruti comes from Diesel cars. As far as price difference between Petrol and Diesel variant cars is considered, the extra cost can be nullified through breakeven within 1-1.5 years. With the new norms, pricing will get increased considerably. So, there might be a lot of problems in order to achieve breakeven. Thus, there will be a drastic price difference between Petrol and Diesel cars. So, with the newly implemented Bharat Stage VI Norms, the demand of diesel cars might get hampered due to the affordability issue.
- Since, NDA government (2014-2019) had deregulated the Petrol and Diesel cars prices before BS VI Norms, the Auto players are going to loose the advantage of deregulation of prices between petrol and diesel cars.
- As a consequence, most of the auto companies are planning to shift their focus merely on Petrol, CNG, Electric and Hybrid cars instead of diesel cars. For the same reason, Maruti is now focusing on developing the Maruti-Toyota partnership.
- Therefore, due to strict emission norms, automobile industry can go through a chain in coming 12-24 months. Mahindra & Mahindra (M&M) is having a big segment in Diesel vehicles. So it will impact on the M&M accordingly.
3.Rising Fuel Prices :
- Due to the recent conflicts between Iran and US, US has said to put the sanction on the country who will trade with Iran. As a result, whatever 15-20% of oil supply India was getting from Iran, is tried to be disrupted by US. For the same reason, the crude oil prices move from $86 to $50 and then again raised to above $70.
- Also the deregulation will impact on the petrol as well as diesel prices and thus, will be a demand damper for cars. Thus, the sales of Auto companies are very low in the recent Q4 results FY2019.
- For Example, In case of Maruti Suzuki, there is a decline of 19% year-on-year in Q4 FY2019 as compared to Q4 FY2018.Though the base effect of 2018 is greater than 2019, still a sluggish growth is expected in FY2019. Since Auto Industry is cyclical in nature, the sector will still remain in the same degrowth phase in next 3-4 quarters.
- But as such there no issue in the Automobile Industry in long-term. It is the time, when you get an opportunity to build your portfolio. Some Auto stocks are structurally very strong. For Example, Maruti Suzuki, Tata Motors Ltd, Eicher Motors are currently trading at 35% down compared to their 52 week high share prices. While Ashok Leyland is at 50% down from its 52 week high. Thus, this cyclical downturn will remain for next 3-4 quarters in the Auto Industry.
4.Higher Insurance Cost :
- For the newly sold vehicles, Insurance of 3 years is made compulsory now.
- 1st year insurance : Own damage + Third Party
- 2nd year insurance : At Least Third Party
- 3rd year insurance : Third Party
- For Example, For a Car pricing Rs.11 Lakh, the premium is come out to be Rs.43,000. Thus, premium is almost 4% of car’s price made compulsory. When (Own Damage + Third Party) is covered for 3 years, then premium will be Rs.79,000, which is around 7.5%-8% of price.
- Thus, due to higher cost of Insurance, the on road price of the car gets increased considerably.
5.Weaker Consumer Segment :
- It is divided to 2 terms : Urban and Rural
For passenger vehicles,
- Rural Segment : 2008 = 4% , 2019 = 30-40%
- Urban Segment : 2008 = 96%, 2019 = 60-70%
- In order to increase the number of cars in a single house in India, the Infrastructure is not developed yet fully. So with the future development in the Infrastructure, it might become a demand booster for Auto Sector. Also, due to considerable presence of Public transport in India, the demand for Automobiles is not as significantly high as expected. Still aspirational demand will be high in next years.
- In Rural allocation, as far as Monsoons are considered, 2017-18 and 2018-19 years were not as good as expected. Therefore it hampered the disposable income of the people in rural segment. As we have mentioned above, rural segment is a significantly big contributor to Auto sector.
- And in Urban segment, consumption patterns are getting changed in the recent years. Rather than buying a new vehicle, people are opting for renting where players like Ola, Uber etc came into the picture.
- So the Due to the overall weaker consumer segment, Auto sector was impacted badly in the last 3-4 years.