A scorching summer, coupled with the rigmarole of general elections and a broader decline in consumer demand, appears to have pushed the domestic transportation sector into the slow lane after nearly three years of runaway growth. This downturn is glaringly apparent in the automotive industry where dealerships, burdened by record inventory levels, are offering huge discounts ranging from Rs 25,000 to more than Rs 1 lakh. These incentives mix cash discounts, corporate deals, and additional fittings and gadgets to entice buyers. Meanwhile, the commercial vehicle (CV) sector is witnessing a month-on-month decline, exacerbated by the high base effect of previous years' robust sales.
Air travel, another key part of the transportation sector, is marred by delays, cancellations, soaring ticket prices, and reduced fleet availability due to operational issues. Airlines are grappling with rising aviation turbine fuel costs, which erode profitability amid the summer's peak travel season. While new aircraft orders loom on the horizon, the immediate challenge is to maintain the aging fleet to accommodate the surge in passengers.
Air passenger traffic has recovered, and yields have improved, but elevated aviation turbine fuel (ATF) prices and a depreciated rupee against the US dollar have posed significant cost challenges for airlines. Average ATF prices in FY24 stood at Rs 103,499/KL, 14 per cent lower than FY23's Rs 121,013/KL but 58 per cent higher than the pre-Covid (FY20) level of Rs 65,368/KL. In Q1 FY25, ATF prices remaine 5.4 per cent higher year-over-year but declined 6.5 per cent sequentially in June 2024. Fuel costs constitute 30-40 per cent of airlines' expenses, with 45-60 per cent of operating expenses, including aircraft lease payments and maintenance, denominated in dollars. Airlines also have foreign currency debt, with some natural hedging from international earnings. To expand profitability margins, airlines must adjust fares in line with rising input costs.
Rail travel, once a reliable option for the economically disadvantaged, suffers from surge pricing. An RTI query revealed that nearly 1.4 crore passengers were denied train travel in the first half of 2023 due to a lack of confirmed seats. The plight of both air and rail travellers persists, while prospective car buyers might find this a fortuitous time to purchase, thanks to substantial discounts driven by sluggish demand and high inventory. However, for vehicle manufacturers, the first quarter of FY25 could be the bleakest since the pandemic, with market conditions offering little reprieve.
Inventory Surge, Dropping Demand
Automobile manufacturers anticipate a record inventory of over 4 lakh units of cars worth around Rs 43,000 crore in May and similar numbers for June, due to a 5 per cent projected drop in passenger vehicle registrations compared to last year, same period. This decline stems from election-related uncertainties, the end of the marriage season, and heatwaves, particularly in north India, Delhi-NCR and key towns and state capitals in the northern states. Despite this, factory shipments to dealers are expected to reach 3.4-3.5 vehicles, a 4-4.5 per cent increase from last year. Planned shutdowns by some companies will help manage production and inventory but the big worry is the line-up of around dozen-plus new car launches (including face-lift of existing models) beginning July-end till the festive season ending December.
Outlook for PV Segment
A top sales executive noted that industry stocks are at an all-time high, with inventory levels surpassing those during the last festive season. ICRA had earlier predicted a sales slowdown to 3-6 per cent in FY25 due to a high base from the past three years. PV sales increased from 2.7 million in FY21 to 3.9 million in FY23. FY25 exports are expected to grow 4-7 per cent, while domestic commercial vehicle sales could drop 4-7 per cent due to election impacts on infrastructure projects. FADA reported a modest 2.6 per cent YoY growth in May 2024 but highlighted a nearly 10 per cent sequential drop from April. Dealers cited elections, extreme heat, and market liquidity issues as major factors, predicting continued sluggishness until the festive season in October. Discounts and consumer incentives are expected to rise by 15-20 per cent in June to combat elevated inventory levels.
The Federation of Automobile Dealers Associations (FADA) said: "Elections and related uncertainties affected customer sentiment, has been delaying purchasing decisions as seen in the numbers for May 2024." FADA President Manish Raj Singhania said, "In May 2024, the Indian Auto Retail sector achieved a modest 2.6 per cent YoY growth. The passenger vehicle (PV) and tractor (Trac) were in red by 1 per cent each YoY." On a sequential basis, the drop was nearly 10 per cent in May compared to the April numbers. The PV segment showed a decline of (-1) per cent YoY and a (-9.5) per cent) MoM decline. Despite better supply, some pending bookings and discount schemes, the lack of new models, intense competition and poor marketing efforts by OEMs affected sales. Additionally, increased customer postponements and low enquiries further contributed to the challenging market conditions. Due to the extreme heat, the number of walk-ins to showrooms dropped by around 18 per cent.
Challenges for CV Segment
As per the latest report from FADA, the Commercial Vehicle (CV) segment showed a decline of eight per cent on a month-on-month bases. Dealers reported that elections and extreme climatic conditions heavily impacted sales. Despite growth due to a low base from last year and increased bus orders, the industry is facing challenges from wholesale pressures, government policy effects, and negative market sentiment, said dealers. But on a YoY comparison, there was a small growth of 4 per cent due to good movement in market loads with the cement, iron ore, and coal sectors contributing positively.
Ratings agency ICRA also expects the domestic CV industry’s uptrend to be arrested in FY25, with a decline of 4-7 per cent in wholesale volumes. This follows a muted YoY growth of 1 per cent and 3 per cent for wholesale and retail sales, respectively, in FY24. The healthy growth witnessed in H1 FY2024 tapered due to a slower Q4 FY24, which saw a decline of 4 per cent in wholesale volumes due to factors such as implementation of the Model Code of Conduct and perceived slowdown in infrastructure activities ahead of General Elections.
Among the various sub-segments within the CV industry, the medium and heavy commercial vehicles (M&HCV) (trucks) volumes in FY25 are expected to contract by 4-7 per cent YoY, given the high base effect.
Domestic light commercial vehicles (LCV) (trucks) wholesale volumes are also likely to decline by 5-8 per cent in FY25 due to factors such as a high base effect, sustained slowdown in e-commerce, and cannibalisation from e3Ws. The segment witnessed a mild decline of 3 per cent on a YoY basis in FY24, owing to the above factors in addition to a deficit rainfall impacting the rural economy. Explains Kinjal Shah, Senior Vice President & Co-Group Head, ICRA Ratings: “FY2022 and FY2023 had witnessed a very sharp growth in volume as well as tonnage terms, enlarging the base. The domestic CV volume growth momentum slowed down in FY24 and is expected to dip in FY25 amid the transient moderation in economic activity in some sectors in the backdrop of the General Elections.” Shah, however, maintains that the replacement demand would remain healthy (primarily due to the ageing fleet) and is expected to support CV volumes in the near to medium term. “The long-term growth drivers for the domestic CV industry remain intact,” Shah added.
Overall, while the auto retail sector saw mixed results, the industry is navigating through significant challenges with cautious optimism for the coming months, says Singhania. Let’s hope that this is a temporary phase that will disappear in a few months.
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