Domestic passenger vehicle sales expected to grow by 9-10% in FY18: Report

Rural economy seems to be gaining momentum on account of increase in minimum support prices, farm loan waiver, 7th pay commission, as well as normal monsoon in most part of India.

Car parked at a dealership. Photo: Pixabay

Key highlights:

Domestic passenger vehicle (PV) wholesale dispatches grew by healthy 13.4% during Q2 FY18

Car sales growth is expected to grow by 9-10% during FY18

Rural economy seems to be gaining momentum on account of increase in MSP, farm loan waiver, 7th pay commission

Domestic passenger vehicle (PV) wholesale dispatches grew by healthy 13.4% during Q2 FY18 supported by re-stocking of inventory by dealers post GST implementation, favourable demand momentum and customer sentiments, recovery in rural income as well as moderate cost of car ownership (lower EMIs).

The domestic passenger vehicle sales growth is expected to grow by 9-10% during FY18 and is expected to maintain a 9-11% compound annual growth rate over the next five fiscals, according to an ICRA report.

The report said that the growth trend was in line with its earlier estimate where it anticipated inventory re-stocking as well as favourable macros to support healthy wholesale dispatches. Rural economy seems to be gaining momentum on account of increase in minimum support prices, farm loan waiver, 7th pay commission, as well as normal monsoon in most part of India.

Two key OEMs ie Mahindra & Mahindra and Maruti Suzuki which have a sizeable exposure to rural segment, witnessed handsome growth in wholesale growth dispatches in recent months. Urban demand also continues to remain healthy on account of pay-out of 7th pay commission, moderate inflation and favorable customer sentiments, it added.

TRENDING NOW

Subrata Ray, Senior Group Vice-President, Corporate Sector ratings, ICRA, “Overall macroeconomic indicators remain favourable with GDP growth rate expected to accelerate in H2FY2018 and rural income also projected to recover in the backdrop of normal monsoon in most region of India. Also, cost of car ownership continues to moderate on account of falling interest rate and moderate fuel prices. Given the low penetration levels in the country, the long-term prospects of the industry remains favourable. We expect domestic PV sales growth to grow by 9%-10% during FY2018 and we maintain a 9%-11% CAGR estimate over the next five fiscals. Growth rate could accelerate further by 100-150 basis points in case of speedier recovery in economic activity.”

Overall capacity utilisation level in the industry remains modest; however, the statistics vary significantly across OEMs. In order to address the capacity utilization issue, few multinational OEMs have started using Indian operations as an export hub for small cars which has helped them improve the overall utilisation of the Indian operations.

Barring exception of few players, the automobile industry’s profitability metrics are unlikely to witness material improvement in the near term, despite improved prospects of sales volume growth in view of (a) need for expenses towards new product development, (b) increase in employee expenses and (c) likely sustenance of discounts-led sales push resulting from restricted pricing power in the wake of intense competition.

Also, recent trend of rising commodity prices will keep profitability margin of OEMs under check in the near to medium term. The market share in the domestic PV segment is expected to remain concentrated over the medium term, with the top five 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.

TAGS: