Auto Sector Struggles: Low Profits, High Inventory, Shrinking Margins

The Indian automotive sector is facing a tough road in the first half of FY25, struggling with declining profits, high inventory, and shrinking margins. While some players bucked the trend, the overall picture shows some major challenges for manufacturers and dealers alike.

Profit Decline Show Sector Woes

Major companies reported a sharp decline in profits during Q2 FY25. Maruti Suzuki, for instance, saw its profit drop by 17% compared to the same quarter last year. The dip in earnings is attributed to subdued demand and competitive pressures, which have forced companies to adopt aggressive pricing strategies.

High Inventory Levels Signal Demand Mismatch

Dealers struggled with record inventory levels of 80-85 days in September, amounting to approximately 7.9 lakh unsold vehicles valued at Rs 79,000 crore. This surplus not only ties up a huge chunk of working capital but also adds pressure to offer steep discounts to clear stocks, further squeezing margins.

Shrinking Margins Amid Competition

To counter muted demand and rising competition, automakers implemented promotional strategies that eroded margins. Price cuts and festive offers, while aimed at boosting sales, have reduced profitability across the board, creating financial strain for several players in the sector.

Performance: Mixed Results

Key players showed mixed performance during Q2 FY25:

• Tata Motors: Passenger vehicle sales declined by 6.1% year-over-year.
• Maruti Suzuki: Domestic sales dropped 4%.
• Hyundai Motor: Recorded a 6% fall in domestic sales.
• Mahindra & Mahindra: Defied the trend with a 9% growth in auto segment volumes, driven by SUV demand.

Festive Season & Plans Ahead

The December quarter typically benefits from festive demand and year-end inventory clearance. Early signs of recovery appeared in October 2024, with passenger vehicle registrations increasing by 7% compared to the previous year.

While the Indian auto sector faces hurdles, including declining profits and rising inventories, the festive season and strategic inventory management provide potential recovery avenues. However, sustained growth will require a focus on cost efficiency, innovation, and targeted demand stimulation. The sector’s trajectory in the coming quarters will hinge on its ability to handle these challenges.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.