Indian Automakers Build Up Inventory Ahead of Crucial Festival Season

Indian automakers are stocking up inventory big time in the hope of a revival of demand during the upcoming festival season, and any failure in demand pick-up will leave them saddled with excess production for the rest of the calendar year, going by channel checks.

The festival months of October and November are the biggest sales period in India, accounting for a large chunk of annual sales for automakers. With Navratri, Dussehra and Diwali lined up over the next few weeks, companies are betting big on the festival season to drive sales momentum after a sluggish first half of the fiscal year.

“The upcoming festival season is a make or break period for automakers after two years of demand contraction. Healthy retail off-take and inventory correction during October-November will set the tone for recovery in 2023,” said Motilal Oswal.

IIFL pointed out that OEMs are “betting big” on festivals to drive a turnaround after a dull first half.

After two consecutive years of decline in wholesales, industry body SIAM expects low to mid single digit growth for the auto industry in FY2023. But a lot depends on the market response during the 42 days from Navratri to Diwali this year.

The rural economy never really shook off the stupor induced by the COVID-19 pandemic and high inflation, even as urban demand picked up soon after, thanks in part of the sharp increase in salaries in the IT sector after COVID.

This has affected FMCG and auto players in particular.

Urban demand has been relatively resilient with preference for feature-rich and premium vehicles.

New SUV launches from Maruti Suzuki, Mahindra and Tata Motors have received encouraging response, especially in the mid-size SUV segment where demand has been strong and unmet.

The success of Maruti’s Grand Vitara and Brezza, Mahindra’s new Scorpio-N and Tata’s Harrier/Safari facelifts will be revealed during the festivals. Maruti’s new SUVs now account for 50% of bookings and 40% of retails under its Nexa chain indicating changing preferences.

Now, with good monsoons in most parts of the country, the rural economy is also expected to start looking up, feel experts. This will aid recovery in entry-level motorcycle and tractor sales during the festivals.

Retail finance availability has also improved in recent months which will support conversion of customer inquiries into purchases.

In addition to stocking up, automakers have also lined up new model launches, financing schemes and other promotions to entice buyers during this peak purchase period.

Industry is hopeful that after two dull years, festivals will witness full participation of customers without any Covid-related restrictions. This pent-up demand for travel and spending will also rub off positively on auto sales.

Sales during the festive season will have a clear impact on investment and production decisions of manufacturers over the next 12 months.

“A good festive season performance will set the tone for the full fiscal and determine whether auto sales can register growth after two years of decline,” noted Sharekhan.

Modest September

Meanwhile, auto sales remained somewhat tepid in September.

Passenger vehicle (PV) wholesales grew by just 2% year-on-year, while two-wheeler volumes were up only 1-2%. Commercial vehicle (CV) sales showed robust growth of around 25% with strong restocking ahead of the festive season.

Maruti Suzuki, the country’s largest carmaker, dispatched 181,343 units in September, up 2.9% versus last year. The company has been battling supply chain issues over the past year which have improved gradually in recent months.

Utility vehicle maker Mahindra & Mahindra recorded a 19.6% jump in PV volumes at 41,267 units in September as it continues to ramp up supply of its popular SUV models to meet robust demand.

Tata Motors’ domestic PV volumes declined 4.9% year-on-year to 45,317 units in September as the company controlled supplies of its outgoing models ahead of new product launches. But the company remains positive on demand prospects during the festive season.

Most two-wheeler makers including Hero MotoCorp, Bajaj Auto and TVS Motor registered single-digit percentage growth in domestic wholesales for September as they also built up inventory in anticipation of the festive spike in customer walk-ins.

Hero MotoCorp, the country’s largest two-wheeler maker, reported a 2.4% increase in domestic volumes at 519,789 units. The company is sitting on around 45-50 days of inventory currently, higher than normal levels of under 30 days.

Bajaj Auto’s domestic two-wheeler volumes declined 0.6% to 253,193 units in September, but exports were flattish after months of decline.

Chennai-based TVS Motor Company registered 5.7% growth in domestic two-wheeler volumes at 302,259 units. September exports grew 7.9% to 100,294 units, the first time exports have crossed 1 lakh units after July 2022, indicating early signs of recovery in international markets.

Within the CV segment, market leader Tata Motors saw its volumes spike 21% month-on-month in September while Ashok Leyland posted 23.3% growth as against August. Both players witnessed higher stocking by fleet operators ahead of the Navratri and Diwali festivals. The upcoming price hikes from October have also led to pre-buying in CVs.

On the positive side, discounts by automakers have been largely stable over the past couple of months indicating that inventory levels are under control despite higher stocking ahead of festivals.

But any excessive buildup and weak retail off-take during the 42-day festive period starting October could force companies to cut production in November-December in order to correct inventory, as per industry experts.

While supply chain issues are still present, the situation has improved compared to early 2022 when companies lost sales opportunities due to lack of components. Higher inventory will help absorb any marginal impact on production and protect sales.

For now, as Yes Securities says, “all eyes are now on the 42-day festive period” starting October”.