ICRA predicts flat growth for passenger vehicles in 2014-15

by Autocar Pro News Desk Mar 24, 2014


Ratings agency ICRA has forecast that the Indian passenger vehicle industry’s domestic volumes are likely to decline by 6-7 percent in 2013-14 but grow by 2-3 percent in 2014-15. This is due to demand weakness that continues to impact not just the small car segment (which accounts for 55-60 percent of industry volumes), but also the UV segment that had shown robust growth in 2012-13.

The industry operating margin is likely to be under pressure with weak volumes and reduced pricing power – leading to an estimated margin compression ranging between 150-400 bps during 2013-14. The Indian Passenger Vehicle (PV) industry recorded volumes of 2.3 million units (in 11 months of 2013-14), a decline of 6.0 percent YoY. This decline in volumes follows a moderate expansion in industry volumes by 5.1 percent and 2.2 percent in 2011-12 and 2012-13, respectively. The reasons for sluggishness in PV demand over the last three years include high inflation, elevated interest rates and rising fuel prices that have exerted pressure on disposable income of consumers.

However, as many of the cyclical variables become less spiteful, the PV industry is expected to revert to a volume CAGR of 10-11 percent (domestic + exports) over the medium term.

ICRA says the profitability metrics of industry participants too are unlikely to have any meaningful respite over the near term in view of an increase in expenses related to launch of new models, increase in employee costs as several OEMs have announced substantial wage hikes, likely sustenance of discounts-led sales push, restricted pricing power in the wake of intense competition and currency headwinds.

Market share in the domestic PV industry still remains concentrated in the hands of few players, reflected in the fact that the top four players account for 75 percent of industry volumes. This implies that profitability pressures on the relatively low volume players may be even higher resulting in sustained external financing dependence to fund losses and capital expenditure requirements.

As per the ICRA study, the recent excise duty cut could lead to an uptick in demand in next few months albeit consumer enquiry levels haven’t gone up much since the excise duty reduction announcement on February 17. Also, the prevailing weakness in domestic PV demand has meant a relatively prolonged period of heavy discounts offered by OEMs on PV models across segments. However, as PV volumes declined by 9.3 percent YoY in January 2014, the OEMs in response have had to increase the level of discounts in February 2014 and March 2014.


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