It is clear that two-wheelers – where more vehicles are bought on cash than cars and UVs – have seen a deeper negative impact due to demonetisation and will also be the first category to recover from a slump

New Delhi: Any negative impact of demonetisation on car bookings for market leader Maruti Suzuki India has now reversed. Maruti accounts for every second car sold in India, and if the slowdown in bookings seen in November has already corrected for it, there is reason to believe other car makers will also slowly get back their mojo.

Maruti chairman R C Bhargava said today bookings were down by a fifth or 20 percent in November on the demonetisation announcement (year on year) but have picked up this month. Till 22 December, bookings were up 7 percent compared to the same month last year. Unlike some other car makers, Maruti has not curtailed production at all post demonetisation as almost all its models continue to be waitlisted.

Bhargava also pointed out that the 20 percent year on year decline in bookings in November happened because November 2015 was the Diwali month and bookings spike around festivals. So a better comparison would be combined figures for October and November 2015 versus the same two months this year – and here, the two months saw a surge in bookings by 6-7 percent despite the demonetisation announcement on 8 November.

But even as new car bookings have begun to pick up, sales of used cars remain in the slow lane. Bookings at Maruti’s TrueValue outlets declined in November as well as December. Here’s another metric: Maruti’s rural sales grew by a healthy 18 percent this month year on year despite a decline of 11 percent in November after demonetisation.

The only two cars which continue to feel the shock waves of demonetisation are the Omni vans and Eeco – which are used both in goods and passenger transport sectors. Bhargava said that with a reversal in booking trends this month, “Maruti has no cause to worry as we will maintain our production and wholesale predictions. There is just one small thing – I do not want to predict numbers for the next three months just now”.

Bhargava could come up with no cogent explanation for Maruti bucking the trend of fall in bookings (seen by other car makers, some of whom have been forced to curtail production to manage rising inventories), other than to say that Maruti continues to operate the way it has always functioned. He did say, however, that if Maruti can see a turnaround, there was no reason for other car makers to not see a similar increase in bookings over the next few months. Remember, Maruti has been facing a production shortfall, specially for its two latest cars Baleno and Brezza. It has had to divert production to meeting the demand for these two models, which means production of virtually all other cars has already reduced.

The production constraint is expected to ease as Suzuki’s Gujarat plant starts production soon and begins supplying some cars to Maruti too.

Demonetisation has impacted sales of cars and UVs in two ways. According to analysts Pramod Kumar and Sumeet Jain at Goldman Sachs, “Maruti Suzuki is best placed within our passenger vehicle coverage as it enjoys almost 130,000 unit order backlog, has relatively lower system inventory and has the highest number of launches coming up in the next 12 months.”

Bhargava declined to share the calendar for new launches in 2017, merely pointing out that Ignis is slated for launch next month and Baleno RS after that.

Meanwhile, the two Goldman Sachs analysts have said in a note to clients that in India, cars and utility vehicles are “exposed to the rural cash based economic system (we estimate about 25 percent of volumes) which would be impacted by a liquidity squeeze in the short term.” Also, customers who potentially benefitted from the informal economy would now be scaling down their purchase ticket size or deferring purchase decisions in the short to medium term, impacting categories such as higher priced cars/SUVs.

“However, we expect the demand cut to be relatively low with most passenger cars/UVs sold through the formal channel, over 75 percent of sales financed by banks/ NBFCs/vehicle financing firms according to our estimate, and cash purchases carried out within the imposed limits on cash transactions. We see lower inventory, strong order backlog and urban market presence as positives in this scenario. Over the long term, we see more upside from this move as tax net would widen bringing down effective tax rates and increasing disposable income with consumers. We stick with our medium/long term structural themes — SUVs and Automatics,” the two analysts have said.

It is clear that two-wheelers – where more vehicles are bought on cash than cars and UVs – have seen a deeper negative impact due to demonetisation and will also be the first category to recover from a slump. Goldman Sachs says the recovery for cars and UVs could be relatively deeper owing to discretionary nature of the expenditure. “Our estimates reflect the revival of growth from 2QFY18, however we still expect loss of 367,000 units of demand in FY17E-19E. Firms with significant rural exposure could face longer periods of declining growth,” it noted.