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India Car Sales Poised for First Fall in Decade on Demand

Indian suppliers to automakers including Suzuki Motor Corp. (7269) and Tata Motors Ltd. (TTMT) are looking at cutting costs and boosting shipments abroad as they brace for the first annual decline in vehicle sales at home in a decade.

Sona Koyo Steering Systems Ltd. (SONA), which makes steering columns for companies including India’s biggest carmaker Maruti Suzuki India Ltd. (MSIL), is increasing its exports to the U.S. to bolster revenue, Managing Director Sunjay Kapur said in an interview. Jamna Auto Industries Ltd. (JMNA), which produces suspension components for truckmakers such as Tata and Volvo AB (VOLVB), may consider shutting some of its plants should the slump persist, Chief Executive Officer Randeep Jauhar, said in an interview.

The highest borrowing costs among the major emerging markets in Asia and the slowest pace of expansion in a decade have damped demand for automobiles in the $1.8 trillion economy, spurring discounts at manufacturers from Hyundai Motor Co. (005380) to Ford Motor Co. (F) as they lure customers to their showrooms. The Society of Indian Automobile Manufacturers, or SIAM, reported a 4.6 percent drop in car deliveries in the 11 months through February, on course for the first yearly decline since the 12 months ended March 2003.

‘Serious Concern’

“The current situation is of serious concern,” said Vinnie Mehta, executive director of the New Delhi-based industry group Automotive Component Manufacturers Association of India. “Companies are looking internally to cut costs and consolidation. If the downturn continues for another quarter or two, some of them may be looking at exiting their businesses.”

Shares of Sona Koyo, which reported a 32 percent decline in net income in the three months ended Dec. 31, have slid 16 percent this year. They fell 0.5 percent to 10.85 rupees at 11 a.m. in Mumbai. Jamna’s stock fell 26 percent after it reported a 58 percent slump in net income last quarter.

SIAM in January lowered its full-year domestic car sales forecast for the third time in six months as demand waned. February car sales fell 26 percent to 158,513 units, the biggest monthly drop since December 2000, the group said.

“This is going to be a difficult quarter. There’s no doubt about it,” said Sona Koyo’s Kapur, who is based in New Delhi. “If there is a prolonged slowdown, we will have to look at different markets, products and exports.”

Monsoon, Mining

India’s industrial production rose 2.4 percent in January after contracting in the previous two months, according to data compiled by Bloomberg. Output climbed an average 0.8 percent last year, compared with 4.8 percent in 2011. The nation’s statistics agency predicts gross domestic product will increase 5 percent in the financial year to March 31, the smallest gain since 2003.

The consumer-price gauge in February surged 10.91 percent, one of the highest levels in major economies. The Reserve Bank of India’s benchmark repurchase rate remains the highest among major Asian economies even after Governor Duvvuri Subbarao cut it on Jan. 29 by 25 basis points to 7.75 percent in the first reduction since April.

Besides inflation and a slump in factory output, a drier monsoon that hurt farm production and court-ordered curbs on mining in many Indian states have deepened a slowdown in truck sales in the country, with SIAM forecasting as little as no growth this year.

Sales of commercial vehicles declined 1.5 percent in the 11 months through February, compared with an 18 percent growth in the year ended March 31, 2012, according to data from SIAM.

Fewer Trucks

In September, the state of Goa, the nation’s biggest exporter of iron ore, banned all mining after a government panel said the state’s exchequer lost an estimated 349.4 billion rupees ($6.5 billion) because of illegal mining. The nation’s top court extended the halt in October.

“With both industrial production and agricultural production down, we are staring at the wrong end of the barrel,” said Mukund S. Raghavan, executive vice-president at India Motor Parts & Accessories Ltd. (IMPL), a distributor in the southern city of Chennai. “Fewer trucks are plying on the roads and there is less wear and tear of parts.”

The weakest monsoon in three years parched parts of Maharashtra, Karnataka and Gujarat states in 2012, cutting harvests of sugar, cotton and rice. The agriculture sector is set to expand 1.8 percent this year, the least in three years, according to the government’s annual Economic Survey.

‘No Option’

India’s more than 235 million farmers depend on rain for irrigating crops such as rice and cotton. The monsoon, which brings more than 70 percent of the nation’s annual rain, usually makes landfall in the south in June and covers the whole country by July 15.

India Motor Parts reported a third consecutive quarterly decline in net income in the three months ended Dec. 31.

Both Sona Koyo and Jamna are working on reducing costs of their parts to offset dwindling sales as their factories operate at a fraction of their capacity. Jamna is operating at 60 percent capacity, Jauhar said.

“We are working on a massive cost reduction this year and trying to reduce the breakeven point,” said Jauhar. “However, if the demand stays negative for another 18 months, we will have no options but to shut plants.”

Motherson Sumi Systems Ltd. (MSS), India’s biggest auto parts maker, is targeting emerging markets including Brazil and China to meet its $5 billion sales target, Chief Operating Officer Pankaj Mital said in an interview last month. China’s passenger- vehicle market had its strongest start since 2010, with wholesale deliveries rising 20 percent to 2.84 million units in January and February.

Distant Markets

Still, exports for local parts makers may be challenging as the slowdown in India comes on the back of Europe, where the auto market is set to shrink for a sixth consecutive year, according to IHS Automotive research. Component makers may look at increasing shipments to Southeast Asia and Africa, said ACMA’s Mehta.

“Exports are a problem as international markets aren’t looking up either,” said ACMA’s Mehta. “The U.S. is steady but is a distant market for us.”

Automakers in the U.S. led by General Motors Co. and Ford predict demand for cars and trucks in the world’s second-biggest market, on pace for the best year since 2007, will remain resilient as Americans replace their older vehicles with more fuel-efficient models with technology features.

‘Tight Ship’

Auto components sales in India will drop as much as 6 percent in the current financial year, showing no signs of a quick recovery, said Arvind Goel, president of Pune-based Tata Autocomp Systems Ltd., which supplies to Tata, Ashok Leyland Ltd. and local units of companies including Bayerische Motoren Werke AG and reported sales of about 52 billion rupees ($959 million) in the year ended March 31, 2012.

“We will run a tight ship and do all the operational improvements so we don’t lose money and are ready whenever the recovery sets in,” Goel said. His company shelved plans for an initial public offering in 2011 after failing to meet targets.

The slowdown in the component industry make lead to smaller suppliers being forced to close down their factories, according to Umesh Karne, a Mumbai-based analyst at Brics Securities Ltd.

“All the companies will be affected but small players will get hit badly as they are more localized and focused on supplying one or two OEMs,” said Karne. “There may be consolidation in the industry, with bigger vendors gaining share at the expense of the smaller ones.”

To contact the reporters on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net; Ganesh Nagarajan in Chennai at gnagarajan1@bloomberg.net

To contact the editors responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net

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