Sector explainer | Will good times roll in for auto sales?

Current car sales are no match for their previous figures. But then that's no end of the road.

The automobile sector comprises all vehicles such as cars, sport utility vehicles, trucks and buses, tractors, motorcycles, scooters, and three-wheeled autorickshaws. Based on combined annual sales, the industry is the world’s fourth-largest and is likely to break into the top three by 2021 riding on rising income and aspirations of a relatively young demographic nation.

Combined sales totaled 30.9 million units in 2018-19, up from 29 million in the year before, climbing 6.5 percent. The growth was sharply lower than 14.5 percent rise in the year before because of liquidity crunch, higher ownership costs due to mandatory long-term insurance, tighter safety norms and slower overall economic expansion – all passing phases that are unlikely to dent the long-term prospects.

Car sales, which accounted for 13 percent of the total, grew only 0.4 percent, while motorcycle and scooters that made up 79 percent of combined sales rose 6.3 percent. Commercial vehicles and autorickshaws, each with 4 percent share of total vehicle sales, bucked the sluggish trend and accelerated 16.1 percent and 24.8 percent, respectively. Good monsoon improved rural sentiment, and investment in infrastructure boosted demand for trucks while liberal rules and robust exports powered three-wheelers.

Potential for growth is enormous. Car ownership in India was 22 per 1,000 persons in 2018, compared with 980 in the United States, 850 in the UK and 164 in China, indicating much catching-up opportunity. Sales in the developed world are expected to decline in coming decades as alternative forms of public transport become available. Latent demand for cars in India is expected to remain an oasis for global auto majors for many years.

"Rapid urbanization means the country will have over 500 million people living in cities by 2030 – 1.5 times the current US population," global consultancy McKinsey & Company said in a July 2018 report on the Indian auto industry. "Rising incomes will also play a role as roughly 60 million households could enter the consuming class (defined as households with incomes greater than $8,000 per annum) by 2025."

It said demand for mobility would rise as more women and youth enter the job market.

Maruti Suzuki, majority-owned by Japan's Suzuki Motor Corporation, is the undisputed leader, selling every second new car in India. The company sold 1.6 million units in 2018-19, contributing more than half of the parent’s global sales. The unlisted Indian subsidiary of South Korea’s Hyundai Motor Company is the No. 2 carmaker and also the sub-continent’s leading exporter of cars.

Other carmakers include Mahindra & Mahindra, Tata Motors, Honda, Toyota, Renault, Ford, Nissan, and Volkswagen.

VOLUMES KEY

The auto sector is prone to cyclical shifts, enjoying robust sales when the economy is doing well and jobs are aplenty and struggling during economic slowdowns. To gauge performance, it is crucial to watch production and sales numbers that are released every month. The data can be accessed on company websites or on the BSE portal https://www.bseindia.com/.

Detailed figures are also released by the Society of Indian Automobile Manufacturers, an industry lobby group, around the 10th of every month. Hero MotoCorp, the biggest maker of motorcycles and scooters, sold 7.8 million units in 2018-19, up 3.1 percent from a year earlier.

Comparison of volume data, either monthly, quarterly or yearly, indicates consumer demand and competitive pressure. For cars and motorcycles, new launches, prices, insurance cost, and discounts are some of the factors that impact sales. M&M, for instance, saw its sales volume jump by a third in the last two quarters of 2018-19 after it launched new utility vehicle Marazzo in September.

In the case of commercial vehicles, the broader economy, rainfall, farm output, and incomes, financing cost and fuel prices also play a role. Additionally, regulatory issues such as a change in emission norms, the scrappage policy, mandatory long-term insurance and change in axle load norms have a huge impact on demand.

For example, demand is expected to surge before BS-VI emission norms kick in by April 2020 and make it more expensive. The government's policy to scrap commercial vehicles older than 20 years is estimated to boost replacement demand for 2-3 lakh vehicles. However, mandatory long-term insurance that increases cost has dampened demand for passenger vehicles and motorcycles.

INVENTORY, REALISATION

Vehicles lined up in factory warehouses or at dealer showrooms waiting for buyers are reliable indicators of market conditions. The data are published by the Federation of Automobile Dealers Associations, India, every month. In April 2019, inventory levels for motorcycles and scooters were 80-90 days, compared with the normal 20 days.

Increase or decrease in realization, calculated by dividing net revenue by volume, is an important parameter to find competitive intensity and profitability. Recent price cuts by Bajaj Auto in entry-level bikes and big discounts offered on its commercial vehicles point to hard-pressed efforts to push slow-moving sales. Lower realization per vehicle sold will dent profitability and vice versa.

Appendix

Volume refers to a total number of vehicles produced or sold in a period.

Revenue is the income received by a company from sales. It is also called the top line because it sits at the top of the income statement and is an important indicator of performance.

Realization is the cash received by a company on the sale of a vehicle. It is calculated by dividing revenue by volume.

Gross Profit is the profit a company makes after deducting costs associated with making and selling its products.

Gross margin is the percentage of revenue that exceeds the cost of goods sold. It is calculated by dividing gross profit by revenue and then multiplying by 100. If gross profit is Rs 50 crore and revenue Rs 200 crore, the gross margin would be 50/200 x 100 = 25.

EBITDA, or earnings before interest, tax, depreciation, and amortization, is a measure of a company's operating performance. Also called operating profit, it is a bare-bone evaluation tool that strips any influence of financing and accounting decisions as well as taxes.

The EBITDA margin, expressed in percentage, is calculated by dividing EBITDA by revenue and then multiplying by 100.

Net profit is the earnings after accounting for all expenses and taxes. It is the most-watched measure and shows what remains in the kitty for distribution to shareholders. It is also known as the bottom line because it comes at the end of the income statement.

Earnings per share (EPS) is measured by dividing net profit by the number of equity shares.

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