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Post demonetization, auto sector to see sharp decline in December

Auto sector is likely to witness decline in December wholesale figure with the rural retail market suffering a double-digit fall as compared to its urban counterpart due to liquidity crunch post demonetization, says a Nomura report.

According to the Japanese brokerage firm, normalised availability of cash may happen by February-March 2017, post which growth is expected to pick up.

“We expect December wholesales to be impacted by a sharp decline in retail sales due to demonetization,” Nomura said in a research note, adding that Original Equipment Manufacturers (OEMs) might go for inventory de-stocking to clear off 2016 model year inventory.

The report further noted that “rural retails are impacted more (double-digit decline) compared to the urban segment, due to the liquidity crunch”.

The outlook for the auto sector, however, looks bullish post the normalisation of cash crunch. “Normalised availability of cash may happen by February- March 2017, post which we expect growth to pick up,” Nomura said adding “we expect a strong double-digit growth by second half of financial year 2017-18, off the low base.” Segment-wise, the medium and heavy commercial vehicle (MHCV) segment is likely to be impacted most. Nomura expects around 30% year-on-year drop in industry volumes.

“This poses a risk to street estimates of pre-buying ahead of emission norm changes in April-2017, if uncertainty prevails,” Nomura said.

Meanwhile, the passenger vehicle industry is likely to decline about 11% year-on-year. “Annual maintenance shutdown at Maruti Suzuki, and a limited wholesale push to clear off older inventory should keep volumes muted,” it said.

The report also said the two-wheeler industry growth is also likely to decline about 12%. “This should be driven largely by Hero Motocorp, which is likely to see sharp around 30% decline due to poor offtake in rural segment.”