The demand for Indian-made vehicles could be fuelled globally with BS VI compliant vehicles being made mandatory from April 2020, says India Ratings report.
The domestic automobile industry has witnessed strong sales volume growth in FY18 backed by commercial vehicles, according to the March edition of the credit news digest on India’s auto sector of the India Ratings and Research (Ind-Ra). The report added that exports have also revived with 16.1 per cent growth in volumes during FY18.
The report highlights the trends in the sub-segments of auto sector, including passenger vehicles (PV), commercial vehicles (CV) and two-wheelers (2W), with a focus on sales volumes growth, market share movement, change in commodity prices and the recent rating actions.
In FY18, India’s automobile sales volume increased by a record 14 per cent year on year (YoY), the highest growth rate achieved since FY11, according to a India Ratings and Research (Ind-Ra) report. The growth was backed by a strong demand in the commercial vehicles (CV) and two-wheelers (2W) segments.
During March 2018, domestic industry volumes increased 18.2 per cent YoY and 5 per cent month on month (MoM).
Medium and heavy commercial vehicles’ (MHCV) sales grew 12 per cent YoY in FY18, after reporting significantly weak sales in 1QFY18. The blip in 1QFY18 was mainly due to pre-buying witnessed in the previous quarter on account of transition from Bharat Stage (BS)-III to BS-IV, added Ind-Ra report. From 2QFY18 onwards, sales rebounded in the MHCV segment, benefiting from road and infrastructure development in the country, streamlining of the logistics post Goods and Services Tax (GST) implementation and implementation of overloading bans in the country’s larger states such as Uttar Pradesh, Rajasthan and Madhya Pradesh.
Light commercial vehicles’ (LCV) sales also spurred by 25 per cent YoY in FY18. Demand in the LCV segment came from the consumer driven sectors, transportation of agricultural produce which benefitted from favourable monsoons, and growth in online retail.
In March 2018, sales volume of MHCV and LCV increased by 16 per cent YoY and 31 per cent YoY, respectively.
The two-wheeler sales spiked by 15 per cent YoY, with positive contributions from scooters and motorcycles segments. The motorcycle segment which had been facing a slowdown since FY13 witnessed a strong growth of 14 per cent YoY in FY18. A pent up demand in the motorcycles segment, supported by favourable monsoons for last two years and new product launches in the segment were the key drivers for the improvement in sales. Scooters segment continued to record robust sales growth of 20 per cent YoY. In March 2018, 2W sales were up by 18 per cent YoY.
According to Ind-Ra report, the PV segment recorded a steady growth over FY15-FY18. In FY18, domestic sales volume increased by 8 per cent YoY, backed by strong sales of compact utility vehicles, which continued to grow at more than 20 per cent for the second consecutive year. In March 2018, PV sales were up by 6 per cent YoY.
Automobile exports from India revived in FY18, with a 16 per cent YoY growth, driven by robust growth under motorcycles and three-wheeler segments, partially offset by weaker sales in PV and CV segments, added the report.
India Ratings and Research (Ind-Ra) has maintained a stable outlook for the auto sector for FY19 on expectations of moderate sales volume growth in the PV segment, low double-digit growth in the CV segment and steady growth in 2W segment on a y-o-y basis.
“Ind-Ra further expects that the credit ratings of most large players are likely to be unaffected in FY19, despite debt-led capex plans, on account of low leverage and strong financial flexibility. Thus, Ind-Ra has maintained a stable rating outlook. Product launches, adoption of stricter safety and emission norms, and development of electric vehicles (EV) would necessitate increased capex in the medium term,” said Shruti Saboo, Associate Director, Ind-Ra.
Ind-Ra believes that the EBITDA margins of original equipment manufacturers (OEMs) could moderate in FY19, mainly due to i) hardening of input prices, ii) higher development and testing expenses related to new emission and safety norms and iii) the inability of OEMs to pass cost inflation fully to customers owing to intense competition.
Saboo informed, “In FY19, demand for CVs, especially in higher tonnage categories, will benefit from infrastructure development; warehouse consolidation post GST implementation; the likelihood of an announcement of the vehicle scrappage policy; and the possibility of overloading bans in certain states.”
Demand for PVs and 2Ws will be driven by increasing disposable income. However, a rise in fuel prices and an expected increase in interest rates, could curtail demand to a certain extent.
“Although the majority of OEMs have announced plans to launch EVs, Ind-Ra does not expect any major disruption in near-term, though the sector could have significant ramifications in the long term,” she added.
According to Saboo, structural issues dominating the sector include intensifying competition; underutilisation of existing capacities in the CV segment; and technological and regulatory changes.
India Ratings and Research (Ind-Ra) expects the automobile export volume growth momentum to continue in FY19, although at a slower pace than in FY18. Automobile exports from India revived in FY18, after showing subdued growth for two years due to weak economies and currencies in African and Latin America (LATAM) countries. “With the stabilisation of commodity prices and exchange rates, these regions have witnessed economic stability, inducing demand for two wheelers (2W) in particular. Ind-Ra expects high single-digit growth in overall exports volume in FY19,” said Richa Bulani, Senior Analyst, Ind-Ra.
Exports of 2W are expected to continue to grow in FY19 as 2W manufacturers namely, Bajaj Auto Ltd (Bajaj) and TVS Motor Company Ltd (TVS), have export-focused strategies and sufficient capacities in place. HMSI, which exports 2W from India to developing countries, plans to make India an export hub to supply to all markets, including the US and Europe. Bulani added, “If such plans are approved by its Japanese parent, India could see a significant rise in 2W exports over the long term. Africa and LATAM are likely to be the key growth drivers.”
Further, FY19 could see a recovery in PV exports, which declined in FY18 after growing consistently since FY12, driven by utility vehicles. “OEMs were focused towards meeting increasing domestic demand for utility vehicles in FY18, and faced delays in the GST refunds, which, however, has streamlined now. PV exports from India would be aided by the export focus of certain multinational OEMs such as Nissan-Ranault alliance, Ford India Private Ltd, FCA India Automobiles Pvt. Ltd and General Motors India Pvt Ltd. However, high capacity utilisation at Maruti and Hyundai Motor India Ltd (Hyundai) are likely to constrain the capacities available for PV exports with these manufacturers. The Indian utility vehicle OEMs are likely to focus their energies this year on new model launches given the intense competition for gaining market share in this segment,” stated Richa Bulani.
Over 2020-2021, the upcoming facilities of new entrants, such as Kia Motors Corporation, Korea and SAIC Motor Corporation Limited, China, are expected to add to exports from India. Additionally, the demand for Indian-made vehicles could be fuelled globally with BS VI compliant vehicles being made mandatory from April 2020.
OEMs faced delays in the GST refunds, which, however, has streamlined now. PV exports from India would be aided by the export focus of certain multinational OEMs.
Senior Analyst, Ind-Ra
Product launches, adoption of stricter safety and emission norms, and development of electric vehicles (EV) would necessitate increased capex in the medium term.
Associate Director, Ind-Ra