Auto sector is cutting production due to semi-conductor shortage.
Rapid rise in commodity prices - steel and crude oil - has also negatively impacted the sector.
It has been a rough ride for investors who have been awaiting a reversal in the auto sector's fortunes since a long time.
The auto sector has been in the doldrums for quite some time. Right since 2019, auto firms have been battling a slowdown in the sector. Currently, the sector is cutting production due to the semi-conductor shortage.
Battling Problems Since A Long Time
In 2019, the auto sector, especially two-wheelers saw slower growth, even negative growth in some segments. The sector was facing a change in the Bharat Stage emission standards, which increased the costs of production, resulting in higher prices.
Further, these companies were also battling a slowdown in the economy. The numbers clearly show the drastic change – in financial year 2020 (FY20), Hero Motocorp saw its earnings fall by 14 per cent year-on-year. Bajaj Auto saw a de-growth of 1.4 per cent in the same year. Even four-wheeler companies saw their sales fall – Maruti reported a 12 per cent de-growth in revenues in 2020.
With the problems the sector faced, it began asking the government for assistance in the form of tax cuts and other aids for the sector. However, the government was not very forthcoming and the sector continued struggling.
By the end of FY20, the pandemic struck, resulting in supply chain snags and shutting down of outlets. People began cutting down on discretionary expenses. The Nifty auto index corrected almost 45 per cent during the entire period of FY20 indicating the pessimism surrounding the stocks.
However, in an unlikely turn of events, the broader markets and auto stocks began rising fuelled by global liquidity. While several experts suggested the rally was superficial, the results of auto companies backed up the rise in stock price. Some auto companies like Hero Motocorp even reported higher sales in FY21 compared to FY20.
Other auto companies did outperform analysts’ expectations and reported decent sales figures. The pent-up demand helped the volumes of the sector normalise. But right when things began to look better, the sector faced another roadblock.
By the end of FY21, auto companies began facing another crisis – a semi-conductor shortage. While two-wheelers and commercial vehicles have remained relatively unscathed, passenger vehicle companies are likely to face the brunt. Lockdowns in companies that lead semi-conductor production have also aggravated the current crisis, according to reports.
Another issue that has negatively impacted the sector is the rapid rise in commodity prices. Steel and crude oil prices have increased at a rapid pace over the past year, while sales have remained lacklustre. It is likely that margins will remain under pressure for the sector.
The Nifty Auto Index has been underperforming Nifty by a long shot since January. The broader indexes have advanced by 22 per cent, while the auto index has returned around 9 per cent during the past nine months. Along with the semi-conductor shortage, the companies also faced local lockdown across the states due to the second wave.
Tata Motors and Mahindra and Mahindra (M&M) announced that they would be cutting production; while Tata Motors did not reveal the exact details of the production cut, M&M said it would cut production by around 25 per cent in September.
M&M has said that it is monitoring the situation and it expects commercial vehicles, tractor and three-wheeler volumes to be adversely impacted. But, it will be ensuring that its new sport utility vehicle, XUV 700 will not be affected by the production cuts.
Maruti Suzuki saw its dispatches reduce by 22.5 per cent on a sequential basis from 136,500 units in July to 105,775 units in August.
Similarly, Hyundai Motor, which is the second-largest car manufacturer in India, saw a 2.4 per cent sequential drop in sales. The decline indicates that production and dispatches have suffered due to the current input shortages.
It has been a rough ride for investors who have been awaiting a reversal in the sector's fortunes since a long time. The sector is likely to face growth and margin pressure for some time now. Nevertheless, the industry and industry analysts expect a recovery during the festive season.