Hitting a speed-breaker?

S. Vaidya Nathan

THE automobile sector shows no signs of any notable improvement eight months into 2000-01.

The numbers put out for November and the aggregated April-November 2000 period point to a continuous slowdown in this vital sector.

Taken together with the weak trends in the industrial production in infrastructure sectors, the sluggishness in the economy comes to the fore. It may mean that the Government and the RBI may prefer to maintain a stable/positive bias (declining trend) on interest rates though a rate decline is not supported by other factors.

The one source of some comfort to the economy is the decline in oil prices but, here too, whether the decline in the past one month is of sustainable nature is subject to some doubt. Even if that is the case, the cost side pressures in terms of lower petro-product prices are not likely.

This is attributable to the fact that even at around $20 a barrel, the price hikes effected two months ago may still not cover the deficit on the Oil Pool Account. The recent oil price decline may just about reduce the stress on the OPA and temper the pace of rise in the oil pool deficit.

More pronounced price declines may be needed for a lowering of petro-product prices. It is in this context that the trends in the automobile sector constitute a worrying one (see Table).

Quite clearly, the two heavyweights in the crucial commercial vehicles -- Tata Engineering (TELCO) and Ashok Leyland -- appear to be headed for an extremely difficult year. Look at the following observations:

* Tata Engineering's commercial vehicles sales is down by 29 per cent at 3871 units. Its car sales has suffered a 51 per cent setback compared to November 1999. The trend in commercial vehicles is no different for Ashok Leyland though the magnitude of the decline is somewhat lower.

* The car industry, as a whole, has seen sales of 43,605 units, down by around 20 per cent year on year. For the cumulative eight-month period, sales are down by around four per cent, suggesting an acceleration in the decline in recent months in car sales.

* The only saving grace is that the volumes are 12 per cent higher than the October 2000 levels, but this is a small consolation, indeed.

Even in other segments, such as tractors, multi-utility vehicles and, to some extent, two-wheelers, a slowdown in demand is quite apparent. In the multi-utility vehicles segment, Toyota's entry has expanded the market and it has taken a 20 per cent share. If this is counted out, existing players such as Mahindra and Mahindra, TELCO, Bajaj Tempo and Maruti have taken a hard knock.

The trends in the automobile sector clearly point to factors beyond the fiscal changes which altered sales tax levels in a detrimental manner. The heavy burden of higher oil prices; the fiscal imposts of close to Rs 10,000 crore in the 2000-01 Budget; the sluggish economy; the concerns over freight availability; continuing excess supply of commercial vehicles; the structural changes in transportation of goods (through more containers), oil and gas (both through more pipelines) seem to be taking a toll on demand, especially, commercial vehicles.

The car market may be cooling off after an expansion last year, driven by influx of more models. Scaling up on the model front which drove volumes last year, may not be an important driver of demand this year. Overall, the picture does not look good and the weak trends in the last eight months may carry over to 2001-02.

There may be an interlude in March as traditionally more volumes are pumped into the distributor/consumer system. A doubt on this too has to be placed, as distributors may be more shy of taking on pumped March volumes, given the experience in the past few years. All these aspects on the auto sector seem set to push auto ancillary companies (except those with good exports) to a point of struggle for survival, leave alone growth.

More SEBI moves

The Securities and Exchange Board of India (SEBI) has announced the most recent of its tinkering with the regulatory framework for IPOs and listing. It has announced the following changes:

* The restriction regarding the minimum public issue size of 10 per cent is now available to companies in all industries. Earlier, this facility was available only to the IT, telecom and media sectors. Companies in other industries had to offer 25 per cent to the public.

* The caveat is that 20 lakh shares would have to be offered and the minimum offer size must be Rs 100 crore. The latter is an enhancement from the present limit of Rs 50 crore applicable to the three earlier specified sectors.

* The offer must be made only through the book-building route, with an allocation of 60 per cent to institutional investors only. The limit of Rs 25 crore prescribed for such offers through book building route has been done away with and allocation can be less than 60 per cent to institutional investors, if the track record criteria is fulfilled.

* All new companies would be required to maintain non-promoter holdings at the same level as at the time of entry into listing (10 per cent or 25 per cent). Existing companies would have to raise the level of non-promoter holdings to at least 10 per cent within one year. If they fail to do so, an open offer would be required to buy out the residual public shareholding. This move is intended to ensure minimum floating stock on a continuous basis.

* Level of non-promoter shareholding has to be disclosed to the stock exchanges on a half-yearly basis.

Given the frequent changes that are made, there is a clear case for SEBI to critically examine the regulatory framework for capital offers and listing to come out with one new code which will be better than having so many notifications on the original code. This has become a must as too many changes have been introduced, making the original regulatory framework almost redundant and the overall framework, a bedrock of confusion and complexity.

Pic.: The SEBI Chairman, Mr D. R. Mehta.

Picture by Shaju John