Automobiles
The automobile sector is in for a rough ride, not just in the next few quarters but possibly for the next year. According to experts, with demonetisation of high denomination old notes already sucking out a significant amount of cash out of general circulation, sales of automobile have already seen a dip.
But while many say that this would be a temporary short term effect, industry analysts think it could last longer. “The impact will be high in segments that depend the most on rural sales, because most are cash based and the short term impact is already being felt. I think that even long term, for a year or more, the industry is likely to slow down by 5 to 10 per cent,” pointed out Abdul Majeed, auto analyst and partner, Price Waterhouse Cooper (PwC).
Most hit, experts point out, will be two wheelers and the SUV segment. Rural markets, where financing is low and cash transactions are high, account for close to two-thirds of entry motorcycle sales. A dealer for a major two-wheeler maker told Express that the number of customers had dropped by 90 per cent since the announcement.
“Be it two-wheeler or four-wheeler, usually in rural areas, they pay in cash. With a liquidity crunch in the market, these sales have dropped,” observed Gulshan Ahuja, secretary general of Federation of Automobile Dealers Association. Even in urban areas, the sales have come down, he pointed out.
Other segments are also set to be hit hard. According to the Society of Indian Automobile Manufacturers (SIAM), 35 per cent of passenger car sales come from rural markets. While the last few quarters have been high growth periods, what is problematic is that the growth has been driven by two-wheelers and Utility Vehicles. “A large part of both are driven by rural demand and cash,” pointed out Majeed.
The impact has already drawn the attention of financial analysts. Deutsche Bank, in a report after the announcement, said two wheeler companies will be most affected in the short term. It cut EPS forecasts and target prices for auto companies in India in a range between 2 to 15 per cent. For domestic focused companies, the cut ranged between 6 to 18 per cent. Used car sales might also come down precipitously, said a senior analyst.
However, some sector players are optimistic about the eventual benefits from the move. R Dinesh, Chairman, Auto Serve 2016 and Joint Managing Director, T V Sundram Iyengar & Sons Ltd said, that demonetisation and resulting digitisation “is going to help the aftermarket (service and spares) evolve to a great extent.”
Consumer goods
Even as industry experts view the government’s decision to ban `500 and `1,000 notes as negative for most pockets in the economy from a short-term perspective, in the longer run, the extent of its impact on growth will depend on the size of unaccounted money in the economy. But one of the sectors likely to be affected regardless is consumer goods, especially those like Air-conditioners, Refrigerators and other products where customers engage in discretionary spending.
According to market research agency Nielsen, consumers have already tightened their fists in the wake of the cash crunch. “Inventory of distributors has increased due to lower off-take from wholesalers and retailers,” it said in a report, adding that it expects consumer goods wholesalers to be the worst hit as off-take has slowed sharply. To counter this unprecedented cash shortage, consumer companies have been pushed to extending credit to wholesalers. However, some industry players are optimistic that there will be an eventual resurgence in demand.
The common man is likely to adapt to the move which would further improve the sentiments, said K J Jawa, MD and CEO, Daikin India, which makes air-conditioners and other products. “Today, the penetration level is too less. But in the long run it’s going to be win-win situation. We believe that people at large would be spending more on commodities rather than blocking the money. The temporary set back isn’t really an issue,” he pointed out.
However, analysis agencies are more forthright in pointing out the impact it has already had. “Businesses with a high cash component, like grocery stores and coffee shops, are being disproportionately impacted,” said a report from Motilal Oswal. And sales of goods like TVs, washing machines etc could slump by more than 60 per cent, say experts.
Logistics
Even before the real impact of demonetisation was percolating into the national psyche, one of the largest sectors in terms of both employment and revenue generation had been hit. The road based inter-state logistics segment, the largest in the segment, had nearly come to a grinding halt just a day after the announcement. And the situation is only getting worse, and might deteriorate further in the coming months, say industry representatives.
According to M R Kumarasamy, president of the Tamil Nadu State Lorry Owners’ Federation, after nearly twelve days since the move was announced and many relief measures had been brought in, more than 20 per cent of the trucks and lorries operating under its banner are standing still gathering dust. And the problem is not one of tolls and fuel. “That has been effectively solved by the government. What is slowly strangling us is the fact that parties to transactions are devoid of cash. Loading has come to a standstill,” he said.
The situation is mirrored across the country. According to a fleet owner in Maharashtra, who preferred to remain unnamed, major interstate toll gates and checkpoints have seen a prodigious drop in the number of trucks and lorries crossing them. “Officials we know say that inter-state movement of goods is steadily decreasing,” he said.
“The situation only likely to keep getting worse because of the complexity of the problem. Right now, none of know how the industry, the markets and dealers of goods are going to resolve the cash crunch. Most do not even have enough to purchase a full load of produce. Our trucks are sitting idle,” said R V Selvaraju, president of the Sankari Lorry Owner’s Association (which has nearly 20,000 lorries plying under its umbrella).
The situation for the sector is worse than others because it gets hit by every side in an economic slowdown. “And most of our members are only two missed due payments away from insolvency,” concluded Kumarasamy.