Market Mix - Car Sales Slump A Bad Omen?

Good morning. There’s trouble brewing in India’s auto sector, with an inventory pile up. Car manufacturers and dealers are openly disagreeing with each other over this pile up. This isn’t good news for the automotive industry but also indicates a larger issue. Read on to know more. 

In other news, India’s antitrust body Competition Commission of India (CCI) has reportedly flagged concerns with the Reliance-Disney merger. Meanwhile, barcodes which are a standard in retail could soon be a thing of the past.

THE TAKE

Is A Post-Pandemic Sales Boom Petering Out? 

There is the disease and there is the symptom. The disease is that auto sales are most likely slowing down and the symptom is rising inventories with car dealers. The question is: is the disease spreading beyond car sales?

There is another symptom of the problem of slow sales — more discounts and schemes are being offered particularly on older models while new models and hybrids are doing well, including with waiting periods.

This is not the first time that older models are selling less and customers are itching for newer ones. But what is happening for the first time is that car inventories with dealerships have hit a record high at over 2 months and stock worth over Rs 73,000 crore.

The situation has exposed disagreements between dealers and manufacturers, which is unusual and reflects that things are definitely worse than they appear. Auto sales are a leading indicator of consumption and the health of the economy as a whole.

The Federation of Automobile Dealers Associations (FADA) whose president Manish Raj Singhania I spoke to earlier this week says their members are carrying stock equivalent to over two months of sales, that is, 7,30,000 units. 

The Economic Times reported car companies claiming that the number was half of this or around 400,000-410,000 units. This is a huge gap and means each faction is accusing the other of some pretty big lies.

FADA has said that it had written to the Society of Indian Automobile Manufacturers (SIAM) twice in less than two months, protesting at stock being dumped on dealers. And to be fair to FADA, they have been pointing out high inventories on The Core Report for several months now.

The Economic Times also reported that car sales in India, the world’s third-largest market, fell for the first time in more than two years in July, as sluggish demand led to an inventory glut at dealerships, forcing carmakers to curtail dispatches (counted as sales) to their channels. Sales declined 2.5% year-on-year to 3,41,000 units during the month.

That decline number might appear small but it's a trend reversal in a seemingly strong market. Which is obviously worrying.

Rating agency Crisil told The Economic Times that it has revised its growth forecast for the domestic passenger vehicle market to lower single digits, from 4-6% growth predicted earlier. 

Earlier FADA had put out an appeal to banks saying they should be careful about lending to auto dealerships, in a way asking that banks check its own members from overleveraging. A considerable part of the stock held by dealers is financed by banks.

Car makers, including the big ones, are acknowledging inventories are high but claim it is lower than what the dealers have claimed. Most of them seem to be saying their inventories with dealers are a little over a month while dealers are saying it is over two months. Car makers also are questioning the total outstanding finance saying it is closer to Rs Rs 45,000 crore and not Rs 73,000 crore as the dealerships say.

Perhaps the answer lies in between but FADA is saying its counting is accurate and not relenting. 

There is a larger problem, again not new. It is in the interest of auto companies to show high sales because many of them, like Maruti, Tata Motors and Mahindra and Mahindra are listed companies. A sign of weakness will hit stock prices. Something that is already happening.

A Bloomberg report said a sizzling rally in India’s auto shares is reversing as a build up of unsold vehicles and growing discounts by carmakers pressure profit margins.

India’s NSE Nifty Auto Index is down 4.1% in August, more than double the decline in the Nifty 50 Index. 

Bellwether Maruti Suzuki India Ltd. has slid 6% so far in the month, on track for its worst monthly performance since December 2022.

The larger question is this.

Are the post-pandemic sales euphoria now disappearing? Sectors like travel and hospitality are already seeing the first signs of the post-pandemic euphoria fading, particularly in the western markets. Could this be happening in India too?

India is at the cusp of the festival season which will last for over a month, into Diwali, a period that usually sees higher sales of all products, particularly discretionary items, including luxury.

Maybe car sales will rebound to higher levels, thanks to newer models but the question is definitely hovering over us. Whether cars or other products and services, will the growth momentum continue?

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Specialty Chemical Reaction

The buzz about India’s opportunity in speciality chemicals is getting louder. The share price of DCW, a speciality chemicals company, shot up 54% in just a month. The domestic demand for performance chemicals is vital due to import substitution. With global companies looking to diversify from China, many Indian firms have ramped up capacity over the past three years. The global demand is primarily driven by the intention of multinational clients to shift from a ‘low per unit cost’ model to a sustainable ‘supply at a reasonable price’, according to a note put out by Aditya Birla Sun Life Mutual Fund. According to India Ratings, an affiliate of global ratings agency FITCH, the chemicals industry is likely to see a gradual recovery in profit margins.  The credit growth for the chemicals sector was the fastest in a long time, at 11.7% in 2023-24, compared to 6.7% in the previous year.

FROM THE PERIPHERY

—❗ Once merged the Reliance and Walt Disney media assets will be a mammoth media business, and that’s exactly what India's antitrust body, the CCI, has a problem with. Reuters reported that the CCI has assessed that the $8.5 million deal would harm any competition in the country because of the broadcasting rights over cricket. It was announced in February that Reliance Industries, Viacom 18 Media, and The Walt Disney Company will merge Viacom18 and Star India to make it a JV that Nita Ambani will chair.

—🛒 Barcodes on consumer products may soon be a thing of the past as companies like Coca-Cola, L’Oréal and Procter & Gamble are looking to upgrade to QR codes, The Wall Street Journal reported. One reason for the switch is that QR codes can store data beyond price, like coupons, recalls, and more. While currently products do feature QR codes which take consumers to websites and tutorials, the ultimate goal is for the same QR code to also fulfil point-of-sale and inventory scan requirements. GS1, the organisation behind barcodes, is working on a project called Sunrise 2027 to fully transition to QR codes. 

—🥙 Mid-sized global restaurant chains are bullish on Indian cities, even as international QSR chains like Pizza Hut, Dominos, KFC and McDonalds struggle with declining same-store sales growth. Belgian bakery Le Pain Quotidien, French patisserie chain Laduree, UK's JD Wetherspoon and Frank HotDogs are some examples of chains who are planning to enter or eyeing expansion in the country with investments ranging from Rs 20-30 crores. They also intend to keep store counts to under 30 to ensure profitability. The Core had previously reported on why having multiple outlets might not be working for big QSR chains, read here. 

—💸 Following concerns from the Reserve Bank of India, regulators have halted local family offices from setting up investment funds in Gujarat International Finance Tec-City (GIFT City), Moneycontrol reported. The central bank fears these setups could be exploited to evade taxes and capital controls, potentially enabling money laundering. This decision impacts GIFT City's goal of becoming a key hub for overseas investments. Established as a free-market experiment, GIFT City faces strict regulations, including a US $250,000 cap on individual foreign investments. The move aims to close loopholes that might allow excess capital transfers abroad.

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