With fuel prices on fire and rising to new highs in cities across India, the auto industry and its customers will have to adapt to a new reality. High fuel costs have come on top of the start-stop nature of dispatches to the dealers of automotive original equipment manufacturers (or auto OEMs) in the April-June quarters in FY21 and now in FY22.

It is difficult to predict what will happen in the auto industry in the coming quarters,amid the ongoing sharp downturn in sales. This is especially true if you consider the fact that the total two-wheeler wholesales in FY21 at 1.51 crore units is less than the 1.59 crore units in 2014-15. Car or passenger vehicle wholesales were already on a downward trend but ended FY21 with around 27.1 lakh units. The car industry just about managed to match FY20 wholesales.

Being a cyclical industry, these ups and downs are par for course. But with income levels falling over the past 12 months, it will be interesting to see how these numbers play out over the course of FY22. The June 2021 wholesale numbers indicate that falling Covid-19 cases, increased vaccination, and receding lockdown measures led to a higher dispatches to dealers.  But inventory at dealers doesn’t necessarily mean sales..

Investors waiting for the Q1FY22 results of OEMs are left wondering how to assess these numbers. Should they look at Q4FY21 numbers which were not affected by lockdowns? Or should they compare it with Q1FY21 because both periods were impacted by lockdowns? In this analysis we will compare Q1 wholesale numbers, but also try to figure out what could be the demand trends going forward and whether pent-up demand will come into play.

Two-wheeler makers look to export markets to keep sales engine running

In FY21, total two-wheeler wholesales fell 13%, mostly because Q1FY21 was marred by lockdowns. But something interesting happened over the course of the year. Bajaj Auto and TVS Motor started to rely more on exports as a proportion of their wholesales. This trend continued into FY22 as well - in May 2021, Bajaj Auto and TVS Motor got some relief from exports as their domestic wholesales halved on a month-on-month basis.

Bajaj Auto was the first to hedge its bets by building a large export business. The company also partly owns Austrian motorcycle maker KTM AG, which contributes knowhow to build better motorcycles for both India and foreign markets. TVS Motor’s exports started doing well at the end of CY 2020, and continued climbing in CY 2021. 

Although Hero MotoCorp exports two-wheelers, it doesn’t contribute a lot to the company’s overall wholesales. In Q1FY22, 92% of Hero MotoCorp’s wholesales were in India, while this was 38% for Bajaj Auto and 53% for TVS Motor.

Eicher Motors’ Royal Enfield is the outlier in this  and continued to rely on domestic wholesales in FY21 and in Q1FY22. The company is trying to increase the contribution of exports in its sales mix. The company saw decent demand after last year’s lockdowns till March 2021. But over the past three months, this has dissipated. The company’s wholesales recovered slowly in June 2021 after lockdown restrictions were eased.

For now, it will be interesting to see if high fuel prices lead to either a shift in customer preferences towards electric vehicles (doubtful), or lead to a fall in demand for two-wheelers.

Restricted intra-city movement knocks down domestic three-wheeler demand

The intermittent lockdowns across many states in India in FY21 dealt a blow to demand for three-wheelers in India. Demand continued to stay muted till Q3FY21 as many states imposed restrictions on movement, which caused total three-wheeler wholesales to contract by one-third in FY21. 

Restriction of movement is one of the primary reasons that three-wheelers wholesales are tottering. It will be interesting to see whether the persisting low interest rates do lead to higher domestic demand for three-wheeler makers in FY22. Unless restrictions are completely lifted and people return to working from office on a regular basis, enabling intra-city travel to return to the pre-pandemic normal in FY22, it is difficult to imagine any meaningful recovery in three-wheeler demand. 

It is no surprise that in April 2021, before states started imposing lockdown restrictions, both TVS Motor and Bajaj Auto’s wholesales were supported by exports and not dispatches to dealers in India. This trend might continue if work from home persists for a longer period.

June 2021 wholesale numbers point to revival in demand for cars

Car sales saw an uptick last year during the festive season around diwali, which helped many OEMs like Tata Motors, Maruti Suzuki and Mahindra & Mahindra recoup the loss of volumes from Q1FY21. But growth in dispatches to dealers began to slow from March 2021 onwards. This continued into April as well and as lockdowns made a comeback in Q1FY22, May 2021 dealer dispatches dipped. This coincided with the rise in price of petrol and diesel. OEMs like Maruti Suzuki and Tata Motors are planning compressed natural gas versions of their products.

The story of passenger vehicles though is incumbents losing market share. Market leader Maruti Suzuki’s market share dropped below 50% in FY21 due to aggressive launches by newer players, including Hyundai and Kia Motors. M&M, which focuses on selling utility vehicles, also saw its market share drop over FY21. This trend has continued in FY22 as well.

Tata Motors though has managed to claw back some of the space it ceded to other players. The company’s new set of models are doing well, and the company’s dispatches in June 2021 were close to that of April 2021.

The current financial year will be one of a fight to keep market share for Maruti Suzuki.  Other players will be hoping their newer models will help them loosen the  market leader’s tight grip on the Indian car market.

Commercial vehicles skid on high fuel prices

Ideally, when the government plans a splurge on infrastructure, commercial vehicle wholesales rise as well. Although last year was marred by lockdowns, commercial vehicle wholesales didn’t pick up even after the economy unlocked and the government took up infrastructure spending.

Trucks and buses saw dispatches fall in FY21, with buses declining mainly because state governments were cash-strapped and demand for school buses remained muted as kids were studying from home.

What did go well for commercial vehicle makers is demand for light commercial vehicles. This has improved across the board as demand for last-mile connectivity due to a rise in e-commerce sales across the country meant small trucks were needed. This is continuing to drive demand for companies like Ashok Leyland, Eicher Motors’ Volvo Eicher and Tata Motors.

Commercial vehicle OEMs are hoping demand for trucks revives once lockdown measures ease across the country. But the high fuel prices might be the spike in the wheel as buyers drive a hard bargain to keep their costs under control.

In an ideal scenario, low interest rates should have caused a surge in sales of auto OEMs. But such is the impact of the pandemic that buyers are waiting it out. The high fuel prices are definitely a cause for concern, which is delaying buying decisions.

The worst affected because of higher fuel prices are commercial vehicle makers. High diesel prices across India is resulting in buyers driving a hard bargain. This is likely to lead to a muted demand scenario for trucks, despite the fact that the government is spending heavily on infrastructure.

The need for personal mobility will lead to some semblance of normalcy in two-wheeler and passenger vehicle demand, but this is not not immune to rising fuel prices either. Many carmakers, including Maruti Suzuki are looking to launch compressed natural gas or CNG versions of their existing models to take advantage of this change.