Carmakers Pray India’s Rain Forecast Is Wrong

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Automakers in India are praying that the weatherman is wrong.

India will likely face the driest two-year spell in almost three decades because of the El Nino weather phenomenon, bad news for farmers who depend on a good monsoon to irrigate their fields. A poor crop would mean a new car will be among the first luxuries to go.

“We’re all looking at the sky,” said V.S. Parthasarathy, chief financial officer at Mahindra & Mahindra Ltd., India’s biggest sport utility vehicle and tractor maker. “And hoping the weather god will be kind.”

The annual June-September monsoon season has become as important as borrowing costs and fuel prices for automakers in India seeking to tap rising farm incomes in their rural push. The rain forecast looms over an industry that revived from a slump in sales with carmakers like Hyundai Motor Co. adding dealerships in the countryside to narrow the lead of Maruti Suzuki India Ltd. and Mahindra, which get about a third of their sales volume from rural areas.

“Rural sentiment on the back of a sub-normal monsoon will have an impact on overall volumes,” said Bharat Gianani, an analyst at Angel Broking Ltd. in Mumbai. “Mahindra is more affected by a poor monsoon as it also sells tractors and light commercial vehicles which are rural driven. There will also be an impact on Maruti but not to such a large extent.”

Shares of Maruti fell 1.1 percent to 3,701.40 rupees in Mumbai on Thursday, while Mahindra declined 2.7 percent to 1,187.60 rupees. The S&P BSE India Auto Index dropped 2.4 percent, while the benchmark S&P BSE Sensex slid 1.8 percent.

Monsoon Forecast

Farm wages on average almost doubled in the five years through March 2014, compared with a 63 percent jump in India’s per capita income.

This encouraged automakers. Agricultural yields have improved and farmers have found additional streams from allied activities such as animal husbandry. Good monsoon rains play a key role in driving demand as more than half the farmlands in the country depend on rain-fed irrigation.

On June 2, India Meteorological Department forecast rainfall may be 88 percent of a 50-year average between June and September. If that forecast is right, this will be the first time since 1986-1987 when rainfall in the monsoon season will fall short by more than 10 percent of the average for two consecutive years.

Negative Sentiment

“Rural sales had been growing twice as fast as urban over the last four or five years” prompting automakers like Maruti to tap this market, said Pradeep Kashyap, founder and chief executive officer of rural marketing consultancy MART, based in Noida, near New Delhi. With the weak monsoon forecast “the sentiment is down. Once the sentiment becomes negative, it takes quite a bit of doing to bring farmers back into showrooms.”

Kenichi Ayukawa, chief executive officer of Maruti, which has seen its share of sales from rural areas surge 10-fold in the past seven years to 30 percent, said on June 3 he was concerned about the monsoon forecast and that there are no signs of demand pick-up.

Automakers in India are hoping a private weather forecaster is proven right. Skymet Weather Services Ltd., based in New Delhi, said June 2 it doesn’t expect El Nino to impact the monsoon.

“We are not monsoon specialists,” Vishnu Mathur, director general of the Society of Indian Automobile Manufacturers, said in New Delhi on Wednesday. “We see different reports and then we look at the report which gives us the most hope.”

New Models

Carmakers are looking to introduce new models and variants to lure buyers. They are also adding dealerships, including ones that will cater to rural dwellers.

Maruti introduced a diesel version of its Celerio hatchback last week. Renault SA, which unveiled its Kwid compact last month, said it will add 48 dealers by December in the country. Hyundai will introduce its new Creta compact SUV in the second half.

The South Korean automaker, which gets 20 percent of its sales volume from rural areas, expects to maintain about 8 percent growth in countryside deliveries as it pushes hatchbacks including Eon, Grand and i10 through its more than 320 outlets in those locations, said Rakesh Srivastava, senior vice president for sales and marketing at Hyundai.

Mahindra, which increased its rural share to 33 percent of auto sales in the year ended March, plans to introduce nine new models including facelifts this year as it steps up efforts to attract more urban buyers and expects the rural market to “bounce back,” Executive Director Pawan Goenka said last month without specifying a timeframe.

“Carmakers have been trying to aggressively increase their rural penetration,” said Amit Kaushik, associate director at IHS Automotive. “Rural demand is already under pressure and if the monsoon is as bad as forecast, it will be a major dampener.”

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