Rural engine helps auto companies stay on growth track
Demand for cars and SUVs in top Indian cities shrinks in first 10 months of FY19.
Demand for cars and SUVs in top Indian cities shrank in the first 10 months of this fiscal year, as many urban dwellers postponed or dropped purchase plans because of increasing congestion on roads & lack of parking space, improving public transport options like metro rail, growing adoption of shared mobility and a general weak consumer sentiment. While growth moderated in small cities too, strong demand in rural India helped the country’s automobile market stay on the growth track, albeit moving at a slower pace than in recent years.
In the top four metropolitan cities — Delhi, Mumbai, Chennai and Kolkata — which account for 11% of India's passenger vehicle market, sales dropped in the April-January period by between 4% and 12%. Six of the country's top 10 cities in terms of vehicle sales also registered a decline, while three posted low single-digit growth. Only Hyderabad reported a double-digit expansion, at 10%.
Overall, passenger vehicle sales grew 4.5% in the 10 months through January. In non-metro markets, the growth was 7.5%.
According to an ETIG analysis, passenger vehicle markets in industrialised states such as Maharashtra, Gujarat, Karnataka, Tamil Nadu and Delhi — together, these account for 40% of the total volume — have shrunk in the past two quarters. In the December quarter, eight out of 13 large states witnessed a fall in sales.
At India’s largest carmaker, Maruti Suzuki, urban sales were flat in the third quarter. But rural sales grew 13%, taking the market’s contribution in overall sales to 39% from 33% at end of fiscal 2017.
The buying behaviour is on the cusp of change in India, a top executive at an MNC automaker said. Due to practical challenges faced in metropolitan cities, customers are deferring their buying decisions. Parking cost, volatility in fuel prices, high interest rates and rising insurance premium, among other things, are making them to carefully weigh their buying decision, he said, adding: “The buying is increasingly becoming need-based as against fulfilling the aspirations.”
Moderating urban consumption is already visible in consumption sectors.
Fast-moving consumer goods companies Hindustan Unilever Britannia, Marico and Godrej Consumer said during their quarterly investor calls that their rural growth had outpaced that in cities.
HUL said its rural volume grew 1.3 times urban in the third fiscal quarter.
Air traffic growth in January 2019 at 9% was the slowest in 54 months. Sales of scooters and premium bikes, bought by urban commuters, fell in the same quarter, but overall two-wheeler volume increased as rural folks continued to buy mass-market motorcycles.
While there is a change in the buying habit of the urban consumer, the trend also reflects a maturing market, said economists. Besides, it indicates increased coverage of the formal financial systems into rural areas, allowing the consumer there to buy more discretionary products.
Rural growth has outstripped urban growth, thanks to the expanding presence of financial institutions in rural markets to offer credit at attractive rates, said Prithviraj Srinivas, economist at Axis Capital, while also warning about a possible slowdown going ahead.
“…we see cyclical softening in the underlying demand in both rural and urban growth in the medium term following credit tightening,” he said.