India's auto sector: poised for growth

Light vehicle sales in the past three months have grown by over 25 percent compared to 2008, indicating that the Indian automotive sector is back on the road to recovery. The recent upturn has been helped by the arrival of the festive season of Diwali, coupled with favourable interest rates and attractive offers. Beyond the festive season, automotive sales for the remainder of the year are expected to maintain or even better the current growth momentum, as sales during the last quarter of 2008 had declined by 22 percent. In addition, sales will be positively impacted by policies to support economic growth, easing of PSU bank lending policies, and the availability of cheap financing schemes.

The stimulus packages announced by the Government included excise duty cuts which have reduced the cost of vehicle ownership. Furthermore, interest rates have dropped to the 8-11 percent range from the 13-14 percent range in October 2008. Indian customers also have more choice available when deciding on vehicle finance. Public sector banks, apart from offering competitive interest rates, are gaining popularity with customers for their ease of operations and transparency. While interest rates are expected to rise towards the end of 2009, we expect vehicle financing to become increasingly available, leading to a return to the trend line growth in automotive sales during the last quarter of 2009 and beyond.

Vehicle sales trend

Over the past four quarters, the Indian market has moved from steep declines to rapid growth. During the first half of the year, the market struggled to maintain sales volumes and managed to register a growth of only 2.5 percent. The third quarter was, however, a very different story with the market posting growth of over 25 percent. Performance during the first half of 2009 was bogged down by the global economic crisis and its knock-on effects on the Indian economy. Also uncertainty associated with the outcome of the general elections only worsened the situation. However, during the third quarter of 2009, the global economy showed signs of improvement and the stability brought about by the results of the Indian general elections provided much- needed confidence in the Indian market, both for consumers and investors.

Going forward, this renewed confidence, along with the resumption of economic growth, will provide the necessary macroeconomic scenario for automotive sales to grow. Another important driver for Indian sales will be the mass production of the Tata Nano and similar low-cost offerings. By lowering the price barrier for vehicle ownership, this new genre of vehicle will enable millions of Indians to upgrade to a four-wheeled vehicle. Driven by low-cost products, India's light vehicle sales are expected to cross the two-million mark in 2010 and approach 2.5 million in 2011. In addition to low-cost cars, automotive sales will also be buoyed by the emergence of rural markets. Historically, India's rapidly growing urban hubs have accounted for most of the country's automotive sales while the vast rural market remains virtually untapped. Rural India, with a population of more than 750 million and a vehicle density of 2.3 percent, presents a huge growth opportunity for vehicle sales.

Realising the growing importance of rural markets, vehicle manufacturers such as Maruti Suzuki and Hyundai are making a huge push into these markets. Maruti Suzuki achieved nearly 10 percent of its sales from the rural market last year and plans to increase this to 15 percent this year. Other automakers are also in the process of forging marketing campaigns focused on rural markets. Overall, the rural market which currently contributes less than 10 percent to the total sales of the industry is expected to see double-digit growth this year and is expected to be a key driver of growth in the future.

Light Vehicle Production Outlook

Towards the end of 2008, Indian automakers were scrambling to bring production in line with demand, following the sharp declines in consumer demand both domestically as well as in major overseas markets. However, at the beginning on 2009, India's major export market, Europe, saw the introduction of multiple scrappage schemes which helped stimulate demand. Small and fuel efficient vehicles were the major beneficiaries of the scrappage schemes, in part due to their overall value proposition, high fuel prices and in some cases stimulus schemes which favoured low polluting small vehicles. Europe's resulting demand for small cars provided much-needed relief to India's auto industry and helped Indian exports of light vehicles grow by 27 percent during the first half of 2009. Domestic sales, on the other hand, only picked up during the third quarter, enabling automakers to resume normal production levels. Many automakers started to ramp up production in July to build up inventory for the festive season. With sales exceeding expectations for the past couple of months, Indian light vehicle assembly is expected to post a 12-14 percent growth to 2.3 million vehicles in 2009 as a whole.

In line with sales projections, Indian assembly is expected to post impressive growth figures in the near- to mid-term as automakers introduce multiple new products, many of which will cater to the low-cost segment. As automakers ramp up capacity and production, light vehicle assembly is expected to grow by over a million units from two million units in 2008 to 3.1 million units in 2011.