Experts said India’s auto industry is saddled with nearly ‘80,000 crore worth of inventory. Tractor sales, which tend to pick up after good crop yield and farm product sales, have fallen over the last two months, making lenders with growing exposure in rural markets tread with caution.
The rural areas account for a sizable chunk of sales for two-wheeler maker Hero Motocorp, and car makers Maruti Suzuki, Mahindra and Mahindra and Tata Motors, the leading sellers in these markets.
“Rural customers, for now, are looking at lower ticket size products, due to which used entry cars and tractors are seeing better traction in such upcountry markets,” said a senior executive of a south India-based finance company.
Even with the arrival of the festive season (August to October), the rural market remains under significant strain due to delayed customer purchases, poor consumer sentiment and persistent heavy rains.
“The overall monsoon story looks good, which will boost rural growth. We hope to see cash flow improving with the upcoming harvest output,” said Shripad Jadhav, president – retail agriculture and gold loans-at Kotak Mahindra Bank. “The penetration of tractors as well as passenger vehicles is still low in rural markets. With aspirations in these markets going up, we are optimistic about the future.”
Industry experts said they expect rural consumers to start buying new products from the fourth quarter of the current fiscal.
“With a good monsoon, we expect rural sentiments to further pick up as we approach the festive season,” said a spokesperson for Mahindra Finance. “Our offerings will cater to regional markets, including remote geographies, and would be designed for local centric requirements.”
Jefferies Brokerage has put a “hold” rating on Mahindra Finance’s shares based on expectation of good rural demand in the second half of 2024, as well as steady disbursement trends for the company.
Experts said that if heavy rains continue in September, it could damage crops and weaken rural purchasing power.
Manish Raj Singhania, president of Federation of Automotive Dealers Associations (FADA), said weather anomalies impact the auto retail market.
“In August, India witnessed 15.9% excess rainfall across the country, with northwest India seeing a surplus of 31.4%, 7.2% in the east and northeast, 17.2% in central India and a minor deficiency of 1.3% in the peninsular region. These weather anomalies have had a direct impact on India’s auto retail market, which registered a modest year-on-year growth of just 2.88% in August,” Singhania said. “Inventory has reached alarming levels, with stock days now stretching to 70-75 days and inventory totalling 780,000 vehicles, valued at an alarming ‘77,800 crore.”
The two-wheeler market saw a month-on-month decline of 7.29% in August, largely due to excessive rains and flooding, which disrupted demand.
As the festive season approaches, there are several challenges that could impact auto sales in the near term. India experienced 16% above-normal rainfall in August, with additional rainfall forecast for September, according to the country’s weather office.
This excessive rainfall poses a significant risk to crops nearing harvest, particularly those planted in late June with a 75 to 90 days maturity cycle. “Continued heavy rains could negatively affect rural sales, as reduced agricultural output may lead to diminished purchasing power too,” said a senior executive of a Mumbai-based finance company.
While the festive season and improved rural demand present promising opportunities for growth, the ongoing weather uncertainties and high inventory levels may temper the overall recovery.