Auto makers stare at their worst festive sales in five years as higher upfront insurance costs and rising fuel prices hurt demand.
The entire auto industry has seen a 20 percent year-on-year drop in overall demand during the October-November festive season, according to Saharsh Damani, chief executive officer of Federation of Automobile Dealers Association. Two-wheelers and passenger cars were the worst-hit segments as customer enquiries didn't convert into sales, he said.
Sales growth slowed down as auto fuel prices jumped to a record last month with the Brent crude trading near its four-year high. Car and two-wheeler makers also increased prices as a weaker rupee increased the prices of imported components. Also, upfront costs rose as buyers now have to purchase multi-year third-party insurance covers.
Higher insurance costs “softened demand a bit,” Sanjay Bhan, head of sales and aftersales at Hero MotoCorp Ltd., India's largest two-wheeler maker, had told analysts during the second quarter earnings conference call.
Damani also said weaker sales led to an inventory pile-up. “The lacklustre festive sales haven't spared top auto makers such as Maruti Suzuki India Ltd., Hyundai and Honda.” The current inventory levels, according to Damani, are at 45-50 days—more than the average “healthy inventory period” of 21 days. The two-wheeler makers were sitting on a 60-day inventory level anticipating strong demand, he said, adding it reduced to only 50 days after the festive season.
RC Bhargava, chairman of Maruti Suzuki India Ltd., had admitted earlier that festive season sales have not been particularly good. Car sales are nearly flat compared to last year, he told BloombergQuint. “Also, overall discounts increased this festive season.”
Crude prices have now fallen more than 20 percent from their last peak. Moreover, the Society of Indian Automobile Manufacturers said the “real impact” of festive sales will be determined in December as Diwali fell in November this year.
December, however, is a seasonally weak month for auto sales and demand as buyers tend to hold off purchase till the new year.
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