The Indian passenger vehicle (PV) industry’s domestic volumes are likely to grow by 5-7% in FY16 supported by return of first-time buyers, replacement demand owing to the large base of FY10-FY11 and aggressive new model launches planned in the compact UV segment. Also, the Indian luxury car market will outpace overall PV growth and is likely to grow at 15-20 in the current fiscal, says ratings agency ICRA in its latest research update on the PV industry.
Citing the underlying issues, ICRA foresees industry’s profitability metrics unlikely to see much improvement in the near term despite improved prospects of sales volume growth. This is in view of:
- The need for recurring expenses towards new product development
- 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.
Over the medium term duration, ICRA expects the PV industry to revert to a volume CAGR of 8-10% (domestic + exports). The market share in the domestic PV segment is expected to remain concentrated, with the top 5 players constituting over 80% of the overall market. This implies that profitability pressures on the relatively low volume players may be even higher resulting in sustained dependence on external financing to fund losses and capital expenditure requirements. Nevertheless, players having low volume in domestic market can leverage on labour arbitrage present in Indian market and can develop export hub for their small car requirement globally.
The Indian PV industry grew by 3.9% during FY15 in contrast with the 6.1% decline in industry volume during FY14. Amongst various automotive segments, passenger car (PC, ~72% of industry volume) and utility vehicle (UV, ~21% of industry volume) segments registered growth of 5.0% and 5.3%, respectively during FY15. On the other hand, the van segment (7% of industry volume) continued to shrink, with volume declining by 10.2% during FY15 after registering a 19.6% YoY decline during FY14.
Growth in the PC and UV segments was driven by new model launches and aggressive discount levels prevailing in the industry. While overall domestic PV growth looks healthy, the growth was largely driven by few OEMs especially Maruti Suzuki India and Honda Cars India whereas other key OEMs like Mahindra & Mahindra, Tata Motors, Ford India and GM India have seen their volume decline over the same period.
Maruti, India’s largest PV manufacturer (market share of 45%) grew by 11.1% during FY15, supported by new model launches (Ciaz, Celerio, Alto AMT) and correction in petrol prices. However, excluding its volumes, domestic PV volume shrank by 1.3% YoY in FY15 suggesting the recovery has not been broad- based and has been restricted to relatively few OEMs.
There has been some moderation in discount level during Q4FY15 but they continue to remain higher than the historical average. On the export front, volume grew by 4.4% YoY during FY15 with MSIL, Volkswagen India (VW) and Ford India witnessing brisk growth in volume whereas Renault/Hyundai saw a decline in exports as they have started catering to European market from other overseas locations.
Nevertheless, Hyundai continues to be the largest PV exporter from India followed by Nissan and Maruti. Overall, Hyundai, Maruti, Nissan, Ford and VW together contribute over 93% of exports volume during FY15.
Diesel share in PV sales to remain at 40-45%
The share of diesel-engined passenger vehicles has moderated from the previous high. ICRA says it expects the diesel share in overall PV sales to remain at a 40-45% level in the medium term. Regular increase in the retail price of diesel in small doses every month since January 2013 has narrowed down the current retail price gap between petrol and diesel fuels, making the cost economics of owning a diesel PV relatively less favourable now than in the past.
The breakeven level has also increased, making diesel car ownership not a lucrative option for customers whose annual driving is less than 10,000km as the replacement cycle has reached ~5 years. Accordingly, the share of diesel PVs in total PV sales has come down to 48% in FY15 from 58% in FY13. Recent (during May 2015 and June 2015) unequal price hike in petrol and diesel has widened price gap, which has reduced breakeven level to 44,000km from 56,000km earlier (during Feb 2015). In case the breakeven level falls below 40,000km, industry might again witness a shift towards diesel cars.
Demand for luxury cars to grow
Meanwhile, ICRA estimates that around 180,000 Indians are estimated to be US$ millionaires and the number of people in this category is expected to grow at a rapid pace, providing attractive growth potential for global luxury car OEMs. These high networth individuals are the key target customers for luxury car OEMs, and OEMs are expanding their sales and service to tap this growing segment. According to ICRA, there is a strong correlation between incremental affluent household and luxury car sales and as such it expects the luxury car segment to triple in volume from the current level (of around 34,000 units) by 2022.