Auto sales in slow lane. Can companies steer a turnaround in H2 FY25?

Things were a lot different a year ago for auto companies. Giant Maruti Suzuki, for instance, had grown its profit by a massive 80 per cent in the September 2023 quarter thanks to the demand revival that was still playing out after a tough Covid run. A year later, Maruti's profit has tanked 17 per cent in the latest September 2024 quarter (Q2 FY25). This is not exclusive to Maruti. The entire industry has reported similar declines. The market has reacted appropriately. The BSE Auto index that delivered 27 per cent higher returns than Sensex in 2023 is now down 14 per cent from its September high (as of November 25, 2024).

What changed?

Auto sales in the first half of FY25 (April to September 2024) have been muted owing to slowing demand that was exacerbated, in part, by adverse weather conditions. During this period, passenger vehicle (PV) sales grew only 0.5 per cent against a 6 per cent increase in the same period last year . The lower offtake has kept inventory at record levels. According to industry body FADA (Federation of Automobile Dealers Association), passenger vehicle dealers were facing an all-time high inventory levels of 80-85 days in September, which meant 7.9 lakh vehicles worth Rs 79,000 crore were lying unsold.

Industry margins, as a result, have been shrinking in the last two quarters. Responding to muted demand and increasing competition, companies are undertaking aggressive pricing and promotional strategies (Tata Motors, for instance, offered up to Rs 2 lakh discount on certain models in September), further resulting in margin erosion. Other costs entail investments in new product features, including advanced technology and safety upgrades that automakers are having to make to stay competitive.

How the bigwigs performed

In Q2 FY25, Tata Motors PV sales dropped 6.1 per cent YoY. The electric vehicle segment, which is its stronghold, was also on the backfoot as its EV volumes fell 16 per cent YoY.

Maruti Suzuki and Hyundai Motor's domestic sales declined 4 and 6 per cent, respectively, for the quarter.

Mahindra & Mahindra was an outlier. Its auto segment volumes (separate from farm segment) grew 9 per cent during the quarter, driven by strong demand for its sports utility vehicles (SUVs). Its SUV sales grew 18 per cent YoY, supported by discounts on popular models.

The outlook ahead

The industry has been in the slow lane in the first half of FY25. But it's not all doom and gloom. The December quarter tends to be favourable for automakers driven by festive demand in the prior months and year-end inventory clearances.

October 2024 already showed signs of a seasonal lift, with monthly sales comfortably outpacing the previous month (check above table). As per FADA, about 6 lakh passenger vehicle registrations have been recorded between October 3 and November 13, 2024— a 7 per cent jump from a year ago. The industry body remains optimistic that inventory levels will decline going forward as sales pick up.

The coming months are crucial. They will reveal whether the ongoing sales slowdown is a temporary detour or the start of a longer, more challenging road.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before making any investment decision.

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