India's car makers stalled in slow lane

India Dispatch: India's car industry is expected to face big challenges in the coming months as slowing economic growth, high interest rates and rising fuel costs continue to stall demand.

Maruti Suzuki said it planned to hike the prices of its cars by up to 20,000 rupees from next month. Amit Dave / Reuters

India's car industry is expected to face big challenges in the coming months as slowing economic growth, high interest rates and rising fuel costs continue to stall demand.

India's largest car marker, Maruti Suzuki, and data from the main industry body this week have suggested a grim outlook for the sector, which has been an important growth market for local and international companies alike.

"With inflation, the real income in the hands of the consumer is low," said Umesh Karne, an analyst at Brics Securities. "What is happening is that they are postponing their decision to buy a car by a few months or a few quarters. The market is correlated to the economy."

RC Bhargava, the Maruti Suzuki chairman, said that car makers were unlikely to achieve total annual car sales of 5 million by 2015 to 2016, as it had initially expected, adding that 4 million was a more realistic target. He said that the market is set to experience just single-digit growth for at least a year.

Sales of 5 million are "not going to happen unless things change miraculously. We are not going to grow the way we did a couple of years back," Mr Bhargava told Mint, an Indian business newspaper.

Competition from foreign car companies that have entered India has added to the pressure on local players, say analysts.

Data released on Tuesday showed that car sales in India plunged more than 8 per cent last month.

The decline comes despite car companies launching new models and offering discounts in a bid to boost sales.

Car sales in India fell 8.25 per cent to 158,257 in November from 172,493 in the same month a year earlier, according to figures released yesterday by the Society of Indian Automobile Manufacturers . The association had originally forecast growth of more than 10 per cent for the full year, but this has been cut to between 1 and 3 per cent.

India's economic growth slowed to 5.3 per cent in the quarter between July and September, while the central bank has left interest rates on hold as inflation levels have remained high.

"For a big ticket purchase, for example a car, that's where you need leverage," said Sujan Hajra, the chief economist at Anand Rathi, a financial services company based in Mumbai. "Given the high interest costs, that's a segment that will obviously take a hit. We think large ticket consumer goods will take some hit until the income level actually improves significantly."

Mr Karne believes that double-digit growth could return to the car sector by the financial year running from April 2013 to March 2014, when he expects the economy to pick up.

Tata in October said it was seeking to improve its image following disappointing sales.

With petrol prices much higher than diesel prices in India, more customers have been opting for diesel vehicles.

"The market showed a marked preference for diesel cars, while demand for petrol vehicles dropped sharply," Maruti Suzuki said recently.

"Despite scaling up production of diesel cars, the company has a customer wait list of nearly 1.25 lakh [125,000] for its diesel vehicles. To counter subdued demand for petrol cars, the company enhanced sales promotion measures that also impacted profitability."

The car company's net profits fell to 2,275 million rupees (Dh153.6m) in the three months between July and September, a decline of 5.4 per cent compared with the same period last year.

Maruti Suzuki last week said it planned to hike the prices of its cars by up to 20,000 rupees from next month to compensate for pressure on its profits from higher costs and currency fluctuations.