Demonetisation: Auto sector in for a rough phase? Vehicle registrations drop in Delhi, WB, Assam in Dec

West Bengal and Assam are worst affected and have seen a sharp drop of 32-37 percent in the first week of December as against last week of November

Narendra Modi government's demonetisation exercise, announced on 8 November to tackle black money and fake currency, has begun to hit labour-intensive sectors like textiles, automobiles and diamond industries, which are staring at the prospects of huge job losses.  The automobile industry, in particular, which had showed signs of rebound earlier this year, is staring at a bleak situation for the next couple of quarters.[caption id="attachment_2734642" align="alignleft" width="380"] Representational image. AP[/caption]According to a report by brokerage firm Emkay, states like Delhi, Assam and West Bengal are worst affected and have seen a sharp drop of 32-37 percent in vehicle registrations in the first week of December compared with last week of November. The state of Uttar Pradesh, too, had also seen a decline of 42 percent in first week of December.Further, in the second week of December, Delhi, West Bengal and Assam saw a sharp drop of 45-73 per  cent over the last week of November, the report said.However, some states are beginning to see signs of rebound despite the persisting cash crunch situation. States like Rajasthan and Maharashtra has been rebound in December, while Uttar Pradesh saw a recovery of 37 percent in the second week of December.Earlier this month, The Economic Times report said that car makers such as Maruti Suzuki, Honda Motor, Hyundai Motor, Mahindra & Mahindra, Renault Nissan and Ford Motor are extending shutdowns from a week to around two weeks this and next month.Although Maruti and Hyundai Motor India said the shutdowns were as per their initial plans and not because of demonetisation, Honda Cars India and M&M have been suspending production for past few days due to higher inventory at dealerships, the ET report said.To give a perspective, Honda Cars India said its Greater Noida and Tapukara plants will operate for just fours days a week, and both the plans would remain shut in the last week of December for maintenance purpose. Similarly, M&M has carried out annual maintenance shutdowns from 4-8 December and plans another shutdown between 26 December to 2 January. India's largest private sector automobile company, Maruti will carry out its maintenance shutdown between 26 December to 2 January, 2017.

Already, passenger vehicle sales in November grew by just 1.8 percent, the slowest monthly sales in several months. Domestic car sales ticked up to 173,606 units as against 173,111 in November last year, according to data released by the Society of Indian Automobile Manufacturers (SIAM).On the other hand, motorcycle sales last month declined 10.21 percent to 778,178 units, from 8,66,696 a year earlier, while total two-wheeler sales in November fell 5.85 percent to 12,43,251 units compared with 13,20,552 units in the year-ago month. Sales of commercial vehicles, too, were down 11.58 percent at 45,773 units last month.Not just the automobile industry, industry experts said auto component industry, too, are likely to feel the demonetisation heat. Brokerage firm ICRA anticipates auto component industry to grow at slower pace than earlier forecasted 8-10 percent growth in FY2017, in the backdrop of slower than expected pickup in realisation, subdued exports as well as impact on OE demand due to demonetisation measures.In the interim, auto companies as well as their vendors could witness some correction in demand. Also, continued demand slowdown in the US M&HCV market as well as moderating growth in US as well as EU PV market will further dampen overall growth expectations, ICRA said in its report.According to this ICRA report, in FY2016, operating margin of auto ancillaries benefited from soft commodity prices, and these benefits were eventually passed on to the OEMs with a lag of quarter of two. However, the benefits of commodity prices had peaked out in Q3 FY2016 and RM expense (as % of sales) have started increasing sequentially since then.