PV industry: Down, but not out

Though September 2018 was muted for passenger vehicles due to factors such as high base effect and rising fuel prices, the industry remains optimist for the rest of the year with the upcoming festive season expected to give a boost to PV sales.

In spite of being the world’s fastest-growing car market, sentiment in the Indian automotive industry has been dented due to rising oil prices and a weaker Rupee. Rising car insurance costs is also adding to the woes of the industry.

All these factors are having an impact on passenger vehicle (PV) sales, which declined by around 6 per cent for the third straight month in September 2018, hit by high base last year following the enforcement of GST, higher insurance premiums and Kerala floods during August.
Sales of PV by the country’s top two carmakers – Maruti Suzuki India (MSIL) and Hyundai Motors India (HMIL) – reflected the performance of the industry in the first-half of FY19. While Maruti Suzuki PV sales grew at 10.5 per cent (compared with 16.6 per cent in the same period last year), Hyundai Motors India registered a growth of 4.5 per cent against 5.5 per cent last year.
In fact, Maruti Suzuki, India’s leading car maker, reported a fall in quarterly profit in July-Sept 2018 for the first time in more than four years. The company reported profit of Rs 2,240.4 crore in Q2 2018-19 compared with Rs 2,484.3 crore a year earlier – a drop of 9.8 per cent.

Year started with a bang

Passenger vehicles sales in India recorded its highest performance in 2017-18 by touching almost 3.3 million units, growing at 7.89 per cent driven by demand from smaller towns coupled with increasing popularity of utility vehicles. According to Society of Indian Automobile Manufacturers (SIAM) data, domestic passenger vehicles sales were at 3,287,965 units beating the previous best of 3,047,582 units posted in 2016-17.

In January and February 2018 owing to accelerated growth in sales of cars and SUVs, India became the fourth-largest passenger vehicles (PV) market globally for the first time ever, overthrowing Germany. With sales of 560,806 units in the first two months of 2018, India overtook Germany’s tally of 531,100 units. According to the automotive industry body of Germany (VDA), Germany is anticipated to see a 2 per cent reduction in its 3.4 million-unit sales in 2018, while India is projected to witness a 10 per cent growth around the same time.

Then again in the first quarter of 2018-19, PV clocked a strong growth of 19.91 per cent at 873,501 units with the highest growth posted by vans at 27.29 percent with domestic sales of 55,078 units.

Subdued growth in Q2 2018-19
However, PV sales showed a moderate growth of 6.88 per cent in July-September 2018 (after a stellar performance in the April-June 2018 quarter) – mainly due to high base effect. PV segment sold 1,744,305 units in April-September 2018 compared to 1,632,006 units in the year-ago period. Even PV exports during the April-September period declined 2.96 per cent to 349,951 units, said SIAM.

In fact, PV sales in September 2018 declined 5.61 per cent to 292,658 units from 310,041 units in the same month of the previous year. “Passenger vehicle sales declined for a third month in a row in September mainly due to a high base effect. The corresponding month of 2017 saw growth of nearly 10 per cent y/y due to the impact of inventory build-up for the festive season that had begun. At the same time, buyers brought forward their purchases of luxury cars, SUVs, and other bigger vehicles to avoid the goods and services tax (GST) increase,” said IHS Markit in a report.
In September 2018, factors such as higher fuel prices and interest rates dissuaded people from buying new PVs. Some buyers also deferred their purchases on expectation of updated models and price cuts during the upcoming festive season.

“Wholesale dispatches of over 3.1 lakh unit during September 2017 was highest ever monthly volume recorded in the Indian PV industry. Hence, volume decline of 5.6 per cent during September 2018 should be viewed in context of high base of last fiscal as well as delayed festive season in current year. Overall performance was broadly in line with our estimate where we have anticipated muted performance in Q2 FY2018 and volume growth to be relatively better in Q3 FY2018. Despite healthy growth outlook for economy, rising fuel prices and interest rate have negative impact on consumer sentiments, which may impact demand of non-discretionary items like cars,” said ICRA in a report.

In the first nine months of 2018, Indian light-vehicle sales grew 12.4 per cent y/y to more than 3.3 million units. “The key reasons for the increase included new model launches, lower finance rates, and increased production capacity, all of which helped the industry grow at a high, double-digit rate,” said IHS Markit.

Sales to pick-up
With overall macroeconomic indicators remaining favourable and rural income projected to recover in the backdrop of normal monsoon in most region of India, domestic PV sales is expected to pick-up in the second half (H2) of 2018-19. Moreover, increase in minimum support prices of various agri-commodities is expected to give further boost to rural income. “Rural segment which roughly accounts for 30 per cent of domestic volume will be the key growth driver for the overall industry in the near to medium term. Given the low penetration levels in the country as well as poor public transport infrastructure, the long-term prospects of the industry remain favorable. However, high fuel cost and rising interest cost as well as inflation could dampen customer sentiments in the near term. We expect domestic PV sales growth to grow by 8-9 per cent during FY2019 and we maintain a 9-11 per cent CAGR estimate over the next five fiscals. Growth rate could accelerate further by 100-150 bps in case of speedier recovery in economic activity,” stated ICRA report.
For 2018, IHS Markit expects Indian car sales to remain at high levels, in line with the 2018 budget in which the government increased customs duty on electronic components from 7.5-10 per cent to 15 per cent. The duty on completely knocked down kits has also been increased from 15 per cent to 20 per cent, alongside a 5 per cent rise for completely built-up models. Therefore, all manufacturers in India are implementing price rises. “Nevertheless, we will continue to see pent-up demand, high budget spending, new model launches, and favourable finance rates in 2018. During 2019, which is also an election year, we may see a rush in purchases before BS VI emission standards are implemented in 2020, and the market could record high, single-digit growth. In the long term, low penetration rates, the currency ban, and the government’s efforts to implement GST, build smart cities, and revive key sectors (such as mining and infrastructure) should boost job creation. This will translate to more demand for the automotive sector,” said IHS Markit report.
According to IHS Markit data, Indian light-vehicle sales, including passenger vehicles and LCVs, are now projected to grow by 9.9 per cent y/y to 4.06 million units in 2018, while MHCV sales are forecast to increase by 17.5 per cent y/y to 421,397 units.

While September 2018 was muted for passenger vehicles due to factors such as low consumer buying sentiment and high fuel prices, the industry remains hopeful that the upcoming festive season to bring back buyers and give a sales boost to the PV industry.

Table: Segmental volume breakup of domestic PV industry

Source: SIAM Data, ICRA’s Estimates