As we know, Indian lube market is the third largest lubricant market in the world and any drastic change in the business environment has a direct impact on topline and bottom line of the lubricant companies and not to forget local and international base oils and additives sellers.
- If we analyze the last 25 years journey of Indian lubricants market post-liberalization, Indian Lubricants industry has withstood the global & Asian meltdowns in 1998, 2008 and recent 2014. Rather it has been growing YOY steadily due to its vast domestic consumer base and increasing buying power of middle-class society. So one could say safely that Indian lube market is largely insulated from global events and can slow down only if the Indian economy slows down.
- On Nov8, 2016, when the government of India announced demonetization and scrapped old notes of Rs. 1000 & Rs. 500 from the circulation, it was bound to impact virtually every aspect of the trade, as Indians are used to sell and buy most of the goods (including branded luxury cars and expensive jewelry!) by exchanging cash. If we talk only about the lubricants market, automotive lubricants market, being B2C, has been trading mainly in cash, whereas industrial lubricants market mostly B2B, has been trading mainly thru cashless operations. We have therefore decided to study impact of demonetization of Automotive lubes industry in this article. The purpose of this article is to address the current reality, challenges & opportunities coming out of demonetization on all these segments.
- We estimate that the Indian Automotive Lubricants market is approx. 1.2 mT (48% of the total lubricant market @ 2.5 mT), pegged at $ 3 bn (at an average DLP price of Rs. 165 per ltr.). While most of NOCs and major MNCs have sizeable selling of automotive lubricants thru B2B channels [ factory fill & service fill of OEMs, institutional customers, and large independent workshops], we feel on the conservative basis that on an average 70% of automotive lubricants are channeled through bazaar trade.
- Clearly, this 70% of B2C automotive market is whopping $ 2.1 bn, where usual business transactions have been happening in cash. In order to assess the impact of demonetization on this particular auto lubricant B2C market, we interviewed a large number of mechanics, retailers, distributors, large & small transporters, used car dealers, workshops, blenders, and few lube companies across the urban and rural market of this vast country. The assessment provides some good insights about short-term and long-term impacts of demonetization on lube market and more importantly the changing buying & selling behavior of the lubricants Industry :
1] During Nov. 2016, many lubricants companies have seen a drop of 15~20% in primary sales. There is a much higher drop of 30~35% in secondary sales and even up to 45% drop in tertiary sales. Mechanics across the country have reported 40~50% drop in daily footfalls, as consumers prefer to keep limited cash on hand for essentials and delay the servicing their vehicles. As a result, there is a similar drop in sales of spare part and accessories. The trend was common across the 4 regions (both urban & rural), we have seen.
2] Due to continued cash crunch situation in December and mechanics across the regions not still showing an inclination to adopt cashless methods of payment, we expect a further drop in the footfalls of consumers to the unorganized sector. If mechanics continue to show resistance to cashless, consumers are already telling us that they would shift to organized independent or franchise workshops in the near future.
3] Relatively retailers and distributors are showing more inclination to adopt cashless ways, though the degree of behavior is different from region to region. West is leading in terms of behavioral changes to cashless, South is slow to respond to cashless, whereas North & East are still skeptical to change their behavior to ‘cashless’ from cash. Certainly lubricant companies need to drive a major ‘behavior change’ towards ‘cashless’ by educating the distributors and retailers (and probably mechanics, as they are the most influential in the whole value chain).
4] As everyone is facing challenges to get cash, both distributors and retailers are forced to give extra credit time. This is bound to impact the networking capital of the lube companies and base oil companies due to the ripple effect, in the short term.
5] The most impacted markets are two-wheeler in rural and used cars in both urban and rural, as a number of cash transaction is high for these segments. Almost 30~35% of used car sales leads to new car purchase. So if the used car market does not recover, it may adversely impact the volumes of the new car market over the next 3~4 months.
Sales of two-wheelers have been hit due to the temporary liquidity issues and most of the dealers feel that this will rebound once the cash situation improves or more people change to cashless methods.
Any slowdown in rural areas will have a bearing on two-wheeler sales, as rural markets account for close to two-thirds of entry two-wheeler sales in the country.
6] Monsoon in India has been extremely good, leading to improved agricultural output. The mood was quite upbeat in almost all rural markets, which should reflect in growing consumption of tractors oils and two-wheelers oils, once cash position improves. Again here, we feel that if consumers in rural areas and semi-urban areas are educated on adopting new ways of transactions, lubricant companies could gain a lot in terms of sales.
7] The overall commercial vehicles sales in November 2016 in the domestic market stood at 20,538 units, lower by 17 percent over November 2015. With fleet owners and their customers short of cash, not all trucks are plying. Spot market has been completely impacted and smaller fleet owners have clearly delayed their purchase of new trucks. Lubricants for commercial, which comprise both truck and tractor segment, contribute approx.65% of total automotive lubricants. So clearly the slowdown in the movement of goods and currency shortage in the rural market will impact the sales of lubricants in the short term.
8] Federation of Automobile Dealers Association (FADA) hints November retail sales for passenger cars have been affected by 30 percent while the figure is expected to go down further in December if things don’t improve ( Car companies are offering huge discounts to arrest the slide). However, they maintain that many a time the reason is not lack of cash at buyers end ( as most of the car purchase happens thru’ bank transactions), but the buyers are either busy with other things that have cropped up after currency ban. The car industry has made a “correction” both in factory production and dealer inventories.
While both buyers and sellers in the whole lubricant value chain are adopting to new ways of business transactions, there has been no doubt among automobile lubricants industry that market will bounce back once situation improves, as demand is always there. The lubricant companies who manage the change (and help their customers in the value chain) well, will emerge the winner in the market in such challenging times.
We won’t say that market will change to ‘cashless’ completely and some regions will take more time than other regions, it was clearly evident that the consumers (particularly young generation driving two-wheelers and cars), across all four regions will drive the change faster than before. Our overall assessment shows the impact is going to last over another 3 to 4 months and from April 2017, we expect lubricant market coming back to normalcy.
As the value chain is encouraged to use more of cashless ways of payment, we feel that from October 2017(once monsoon is over), automotive lubricant sector is going to show a robust growth in the sales. More importantly it is expected to shorten the credit period to more realistic level, particularly in north where receivables have always been more challenging than other regions.
There is no doubt that the change in the behaviour of ‘end-customer’ will force the ‘seller’ to change the behaviour forever.
“When the going gets tough, the tough gets going”
This article is written by Shailendra V.Gokhale,Managing Partner,Rosefield DAA International Consultancy LLP based in India. The author has worked in lubricant industry,both in India and UK,for over 23 years.