Festive season may boost auto sales but there's a possible catch

Although festive season demand may provide some temporary relief to the auto industry in the next two-three months, the continued disproportionate wholesale billings by original equipment manufacturers could lead to increased stress for dealers if uptake is lower than expected, according to a report.

In its latest report on the auto sector, India Ratings and Research (Ind-Ra) on Friday said retail sales are likely to continue to lag behind wholesale sales in September 2020 although the sector has reported a month-on-month rise in sales over May-August 2020 after the washout in April.

"After an above-average acreage backed by adequate monsoon, the prospects of a robust kharif harvest have original equipment manufacturers (OEMs) hoping for a retail demand revival from the rural side during the upcoming festive season," the ratings agency said in a statement.

It added that sales are likely to remain sluggish in September, especially on the retail side, "due to the inauspicious period of Shraadh".

The retail demand also improved sequentially over April-August 2020, the sales volumes are still much lower than wholesales. But, passenger vehicle (PV) and two-wheeler (2W) retail sales volumes fell 7 per cent and 29 per cent year-on-year, respectively, in August 2020.

Amid the increasing cases of Covid-19 and job losses across the sections of the society, consumer sentiment remains weak; the overall retail sales in August 2020 were only around 71 per cent of the August 2019 levels, it said.

Ind-Ra, however, said it "expects the festive season demand to provide some relief to the auto industry over the next two-to-three months, albeit temporarily". It added that "any additional measures by the government such as GST cuts or the adoption of scrappage policy could help spur auto demand in the medium term".

The ratings agency also said, "Depleted inventory at the dealer level over June-July 2020, coupled with supply-chain issues, has prompted PV and 2W OEMs to increase production, to have sufficient inventory available for the upcoming festive period."

It added that this trend is expected to continue in September as well. "However, Ind-Ra believes the continued disproportionate wholesale billings by OEMs could lead to increased stress for dealers, if the festive season demand is lower than expected."

Production levels in August 2020 for 2Ws and PVs were at 100 per cent and 94 per cent, respectively, against the previous year, Ind-Ra said.

Inventory stocking was more evident in the 2W segment in August 2020 when retail sales fell 29 per cent year-on-year compared to 3 per cent year-on-year growth in wholesale billings by OEMs, it added.

Motorcycle sales continued to drive the 2W segment's performance in August 2020, growing 10 per cent. Scooter sales volumes declined 12 per cent year-on-year, it said.