Is the auto industry finally switching to the fast lane?

India’s automobile sector, consisting of passenger vehicles, commercial vehicles, two-wheelers, three-wheelers and quadricycles, again ended the last financial year on a bleak note. 

Total dispatches from factories to dealerships declined 6% to 17.53 million units, marked by diverging performances among the segments. The sector’s sales had peaked in 2018-19 when it sold 26.26 million units. 
 

India’s two wheeler segment was the worst hit by the pandemic and it is still showing no signs of recovery. The segment reported its lowest wholesales in the last 10 years in FY22, data from the Society of Indian Automobile Manufacturers shows.

After falling almost 18% in FY20, two-wheeler sales dipped further 13% in FY21 and another 11% last fiscal to 13.47 million units, the lowest since 2011-12. Two-wheeler dispatches are currently just 64% of the 2018-19 level when the segment scaled a high of 21.18 million units.  

On the other hand, the cost of ownership of passenger vehicles (PVs) and two-wheelers has also risen substantially following a surge in fuel prices, price hikes by manufacturers to cover BS-VI costs, and costlier raw materials.

Show the visuals of Honda Activa and Hero Splendour and TVS Jupiter

The transition to BS6 norms from BS4 came into effect on April 1, 2020. This pushed vehicle prices across segments as manufacturers developed new engines that met the rigorous BS6 emission rules. In the year following the introduction of BS6 engines, the price of top models like Honda Activa and Hero Splendour and TVS Jupiter became costlier by 10 to 11,000 rupees.

Meanwhile, the passenger vehicle segment put up a strong show last year, with dispatches rising 13% to 3.07 million units. This segment has recovered to 91% of FY19 level. (below gfx for this para, convert to bar graph)

But this recovery was completely led by a stupendous growth in the sales of utility vehicles, given India is in the midst of an SUV boom. Sales of utility vehicles registered a 40% jump to 1.49 million units while passenger car sales declined by 4.8% to 1.46 million units.

India’s automakers appear to have put the challenges of Covid-19 behind them as sales surpassed 2019 levels in the month of May this year for major car makers like Maruti Suzuki, Hyundai, Tata Motors and Mahindra & Mahindra.  (below gfx for 

Two-wheeler sales remained sluggish but they benefited from some pent up demand and wedding season in the first two months of the financial year. People returning to offices and reopening of educational institutions is also helping Two-wheeler sales this year.

Anuj Sethi, Senior Director - Ratings, CRISIL says, growth momentum in PV sales will continue this year. If not for the chip shortage, sales in FY22 would’ve been higher, he said adding that chip availability is expected to improve from the second half of this year. PV sales can touch 34 lakh units, crossing FY19 record. Income levels in rural markets were impacted in last 2 years and 2W sales expected to register 5-6% growth.  

While semiconductor shortage remains the major challenge for carmakers, Maruti Suzuki Chairman RC Bhargava has said the government’s plan to make six airbags mandatory in passenger vehicles from October 1 will make small cars more expensive and drive out a chunk of potential buyers.

Providing driver and front passenger airbags in all cars is already mandatory.  Adding another four airbags will increase the cost by Rs 17,600, according to auto market data provider JATO Dynamics.

In some cases, the cost could be higher as companies will be required to make engineering changes to the car's structure to accommodate the additional airbags.

Buyers of entry-level cars are much more price-sensitive compared to the bigger car segment.

Meanwhile, the government also increased the third-party (TP) motor insurance premium for various categories of vehicles with effect from June 1, which will jack up the insurance cost of cars and two-wheelers—making their on-road version more expensive.

TVS Motor Company CEO KN Radhakrishnan said this will hamper the efforts of the industry to recover.

CRISIL’s Anuj Sethi says interest rates are still attractive despite the recent repo rate hike by RBI. Further, the reliance of two-wheeler buyers on financing is also coming down. From 70% pre-pandemic, less than 50% of new two-wheelers are purchased on EMIs, he added.

On the other hand, a media report said on Thursday that India’s top listed automotive and ancillary companies have earmarked Rs 30,000 crore for capital expenditure in FY23.

Tata Motors this week signed an agreement to potentially buy Ford’s plant in Gujarat’s Sanand as it looks to ramp up its production of electric vehicles while Mahindra Group has committed Rs 15,300 crore for capex between FY22 and FY24.

Last month, market leader Maruti Suzuki had announced a new factory in Haryana, the company's third in the state entailing a total investment of 18,000 crore rupees.

Anuj Sethi, Senior Director - Ratings, CRISIL, says FY23 capex is 30-35% higher than previous year. Driven largely by OEMs in passenger vehicle space. In 2W space, investments are being directed toward EVs

Sethi says that the order backlog for passenger vehicles caused by chip shortage last fiscal year is expected to contribute to this year’s high growth. He says the backlog could be anywhere between 4-6 lakh vehicles. But this figure could be inflated because consumers tend to make multiple bookings with different companies, and not all of it would translate into sales. Sethi believes that the actual number could be closer to 3-3.5 lakh. Nevertheless, PV sales could touch a new record this year.

Sethi also said that some amount of inventory buildup is required by dealers which could help OEMs in dispatches. The normal inventory level with dealers is about 25-30 days which has now come down to 12-15 days.

For the two-wheeler segment, although the expected 5-6% growth this fiscal is not impressive, especially coming after three years of consecutive negative growth, it would still mark the beginning of a turnaround.