Hope for better Q3

There seems to be no end to bad news on the economy front. The country’s gross domestic product (GDP) growth slowed to 4.5 per cent in the July-September 2019 quarter, its weakest pace since 2013. Compared to the second quarter of 2018-19, it is down by 2.6 per cent points. A number of factors such as dwindling consumption, slowing private investment & exports, and global slowdown have led to this slump.

Meanwhile, the manufacturing sector - considered to be the backbone of the economy - has also witnessed negative growth (- 1 per cent) in the second quarter of this financial year. Sluggish automotive demand is one of the main reasons for slowing the manufacturing sector.

Domestic sales of leading auto companies such as Maruti Suzuki India Ltd, Hero MotoCorp Ltd and Ashok Leyland Ltd fell 30 per cent, 21 per cent and 45 per cent respectively in Q2 of 2019 from a year earlier. Even the just-over festive season has failed to revive demand. While the auto manufacturers reported a surge of 5-7 per cent retail sales during this festive season, the October 2019 wholesale still shows a decline of 7-8 per cent compared to October 2018 for passenger vehicles.

A broad-based slowdown in the auto industry across markets is also impacting the growth prospects of auto component makers. In addition to the slowdown woes of OEMs, ICRA feels that even after-market demand for components, which accounts for 18 per cent of the industry turnover, has slowed. Crisil Ltd estimates a 160-180 basis point dip in FY20 operating margins for the component sector, despite lower raw material prices as demand remains weak.

Decreasing auto production and sales in the country is also hampering the growth of other support industries like coating, forging, etc. Kansai Nerolac – the leading player in India’s automotive coatings market – saw its standalone net sales for the quarter ended September 2019 coming down by 3.89 per cent to Rs 1,243.52 crore compared to Rs 1,293.88 crore in Q2 2018.

The forging industry continues to reel under the auto production cuts and pressure for liquidation of inventory that has built-up due to the changeover to BS VI norms from April 1, 2020 onwards.

The $ 57 billion Indian automotive industry accounts for 60-70 per cent of the forging production. With the auto sector witnessing the worst ever slowdown, the forging industry has witnessed a corresponding average slowdown to the tune of 25-30 per cent. About 83 per cent of the total 400 forging units in India belong to SMEs who contribute 30 per cent of forging production. Revival of auto industry growth is crucial for the survival of forging units.

The Government has already taken several steps, including cutting corporate tax in September, to boost investments and bolster economic growth. According to the government officials, the country's GDP is likely to pick up in the third quarter of 2019 as these measures start showing their effect. Hopefully this forecast comes true.