Discretionary consumer spending was mediocre until September. During the first six months of FY16, the car market grew ~10% y-o-y (year on year). However, this growth is not in sync with any other discretionary products. Other consumer discretionary products including air conditioners, paints, and jewellery are not growing at more than mid/low-single digits with visible pricing/competitive pressure, as well as some down-trading in consumer buying (see charts). The SUV market has been a real reflection of continued muted consumer spending. Despite multiple launches, the SUV market has not grown at all in FY16 y-t-d (year to date) and all new products have just cannibalised the existing models. Even for the car industry, despite its growth, pricing has remained under pressure. In October, however, cars, UVs and 2Ws have all increased sharply, positively surprising the Street. This raises two key questions: (i) What led the +10% growth in the car market in the first half of FY2016 when spending across other discretionary items has been soft? and (ii) Is the sharp pick-up in October a flash in the pan or an early sign of a turnaround in consumer sentiment and spending?
We believe the growth in the car industry in H1FY16 was led by a few factors including AMT traction, continued high discounts, moderation in interest rates and new product launches. However, a key contributor to growth has been the increase in car sharing companies like Ola and Uber. While the exact numbers are not available, we believe that collectively these two companies have added nearly 75,000-100,000 vehicles in the past 6-9 months, explaining nearly 50-75% of the growth in the car industry. Car sharing is negative for the car industry in the long term, but in the near term fleet expansion has a positive impact on the new car market, in particular for Maruti (MSIL IN, R4,650, Buy) as its products are particularly well suited for the cab industry—WagonR and Dzire.
It is difficult to find many high frequency indicators for consumer confidence in India. Some, for example, the Naukri.com index, look encouraging, but are not very representative in our experience. Although the pick-up in October was encouraging, the extent of pick-up may be a one-off and unsustainable. Whilst we expect to see a more gradual recovery over the coming months, the pick-up is still directionally positive and should help support current valuations. Furthermore, the better-than-expected wage hike proposal for government employees should be positive for near-term auto industry volumes.
The Seventh Pay Commission’s recommendation of a 23.6% rise in central government wages was larger than market expectations of ~15%. The impact of wage increases on consumption demand could be strong as a larger government sponsored windfall is likely to coincide with gradually rising urban private sector wages; this is positive for the auto industry. While we expect a recovery in the auto industry to be gradual, sales growth from government employee spending and the likely implementation of GST in the near term should provide downside protection to our current estimates and help support valuations.
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