July 7, 2020

Faster than Expected Recovery Seen in June Auto OEM Dispatch Numbers

June 2020 Automotive OEM sales data reinforces some trends witnessed in May figures, but also throws up some new insights including challenges emerging around inventory levels in the system


Ridhish Talwar

In the month of May 2020, India Inc started opening up their plants and operations after a 2-month severe lockdown. Hero MotoCorp was first off the blocks from within the Automotive OEM pack with dispatches starting on 12th May. As the May numbers started rolling in during the first few days of June, there were mixed emotions which also varied across segments.

Significant uptick seen in June 2020 vehicles dispatch numbers, a refreshing development for most OEM segments with a 2-4x jump in numbers versus May 2020 sales.

The gradual opening up of the economy has meant that the majority of Auto dealerships in India are now operational. Industry sources had indicated that 70-80% of dealerships across OEM brands had started operation in the month of May. In June, Hero MotoCorp and Honda (HMSI) reported 96% and 95% of their respective dealerships operating by the end of last month. Individual dealerships may open and close given the situation in their local zone, but another countrywide lockdown is unlikely at the moment.

Auto OEM YoY Emerging Trends by Category

Farm sector continues to be the shining star amongst the various vehicle categories. Tractor sales continue to expand driven by large scale Government spending in the rural economy through schemes like MGNREGA, as well as a good winter crop harvest. In fact, tractors were the only category that saw expansion on a year-on-year basis in the month of June 2020.

Both Mahindra & Mahindra and Escorts saw a 10% and 19% increase respectively compared to June 2019 data, despite a fall in exports. Escorts reported very low inventory levels (at both company and with channel partners) and also indicated that production levels have been brought back up to 90% of capacity. We expect this momentum to continue with the timely arrival of the monsoon and a significantly higher acreage of the summer crop sowing compared to the previous year.

Economic activity in rural and semi-urban areas of the country continue to recover faster than urban centres. This also explains the faster recovery of two-wheeler (2W) sales relative to the four-wheeler (4W) numbers in June.

All the Major 2W OEMs reported only 25%-35% lower domestic sales in June 2020 compared to June 2019 (May figures were 70-80% lower on a year-on-year basis).

Hero MotoCorp, the largest of the pack sold over 450,774 vehicles in June 2020, as against 108,848 in May 2020. This 4.1x jump in sales for Hero on a month-on-month basis was ahead of most of the other 2W players, mainly due to their focus on domestic markets, entry-level vehicles and a larger presence in rural markets.

In the previous month, we also started seeing support for our hypothesis around downtrading with Dr. Pawan Munjal, the Chairman, MD and CEO of Hero MotoCorp reporting the same in a TV interview with CNBC-TV18 on 28th June 2020. He said, “People have started to downtrade. We are seeing a lot of pressure on our entry-level and our Splendor and Passion motorcycles.”

Major four-wheeler focused OEMs reported 50-60% drop in sales on a year-on-year basis. The largest 4W OEM, Maruti reported total monthly sales of 56,402 units in June 2020, against 18,536 in May 2020 (3x jump) with entry-level categories in the Mini (Alto, S-Presso) and Compact (WagonR, Swift, Dezire, Celerio, etc) sub-segments performing better.

For many popular 4W models, there has been a demand-supply mismatch in June with waiting periods emerging. OEMs are scrambling to ramp up production to meet demand and prepare for the upcoming festive season.

Commercial Vehicles (CVs) continue to remain laggards, but within the category as well, we see a significant difference in the recovery of specific sub-categories. Light commercial vehicles (LCVs) are performing significantly better than medium & heavy commercial vehicles (MHCV) and this plays out in the individual OEM dispatch numbers.

We see M&M only registering a 36% de-growth from June 2019 on their overall portfolio versus a 70% reduction for Volvo Eicher. For M&M, the LCV <3.5T vehicles have recovered to 70% of the demand from last June, but the LCV>3.5T and MHCV are still down by 96% and 93% respectively from June 2019.

By far, the worst affected sub-category within the auto ecosystem is three-wheelers (3Ws) with M&M only selling 13 vehicles in June 2020 versus 4,251 in June 2019.

Last month we noticed that companies with larger % of exports were performing better, but this trend might have reversed with domestic-focused OEMs improving performance significantly. Logistic issues including delays at land borders and seaports may be preventing exporters for shipping orders with specific reports emerging from the India-Bangladesh border.

The robust demand emerging in specific categories like tractors, two-wheelers and popular 4W models are leading to lean inventory levels in the entire system. As OEMs look to stabilise the supply chain and ramp up production, challenges around clear demand prediction, stop/start operations and contract labour availability remain. The automotive industry is now pinning its hope on the start of the festive season in August to take them closer to 2019 levels.