August was a good month for passenger car sales as manufacturers sought to restock inventory channels in anticipation of a rebound in holiday season sales. In fact, growth for the industry-leading Maruti was even marginally higher than Street’s estimates. While demand is returning to the need for personal mobility, long-term demand trends remain in question.
Nonetheless, Maruti’s 21% year-on-year jump (YoY) is encouraging, partly driven by higher sales of compact and small cars. Mahindra and Mahindra (M&M) did not see a sales rebound as growth in SUV sales has been slow. Of course, growth is less than last year, manufacturers had reduced production and sales in an effort to clean up old inventory before the new BS-VI standards went into effect.
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“The car numbers were better than expected in all segments. Since Unlock 3.0, urban recovery is also unfolding. Channel inventory levels had fallen to very low levels previously, and some channels have also been restocking. An additional 10% volume increase is due to restocking. Retail demand is also on the rebound, “said Mitul Shah, vice president of Reliance Securities.
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Analysts are looking for better holiday season numbers this time around, as manufacturers are also expected to announce discounts to boost sales. Analysts also say that the demand for personal mobility is also causing a surge in sales in rural areas, which were quite low over the past three years. In addition, companies are also slowly increasing production as capacity utilization levels fell due to supply chain disruption in auto components.
But people are still skeptical about whether demand will hold up after the holiday season. The cost of ownership of cars has increased after the implementation of BS-VI, while income levels are said to be declining. Still, the drop in trade seen in rising lower-end car sales may put the auto industry through a tough fiscal year.
Stocks in auto companies have hit the gas pedal in recent months. Both Maruti Suzuki and M&M are trading near 52-week highs in the hope that a recovery next year can boost operating leverage and improve margins on a lower basis.
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