Indian PV Industry To Post 22% To 25% Growth In FY2022, After A Negative 2%-4% Growth In FY2021

The Indian passenger vehicle (PV) industry is expected to post an impressive growth of 22% to 25% for FY2022, after a 2%-4% de-growth in FY2021. As per ICRA research, the growth will be on a lower base of Q1 FY2021, primarily due to industry slowdown and the pandemic impact. In addition to the lower base, expected pick-up in economic activity, improved consumer sentiments besides resilient rural income sentiments (less impacted by pandemic), healthy crop cycles and several Government initiatives will propel growth. The shift towards personal mobility from public transport in the present pandemic-laden scenario will also help the sector. Amongst the various PV industry sub-segments, the utility vehicle (UV) segment is likely to post impressive growth and will outperform the rest of the industry.

Throwing more light, Ashish Modani, Vice President, ICRA says, “The V-shaped economic recovery has boosted consumer sentiments from lows of June’21 quarter even though it still remains lower than previous (2019) levels. Consumer sentiments are one of the key indicators for non-discretionary purchases like cars and luxury goods. Demand has remained strong post the festive seasons as both retail and wholesale dispatches witnessed recovery. The industry clocked the best-ever volume during H2 FY2021, primarily driven by inventory restocking and pent-up demand. Also, as demand sentiments improved, discounts offered during the lean phase eased substantially. The industry’s outlook continues to remain stable.”

On the macroeconomic scenario, India is expected to be amongst the fastest-growing large economies during FY2022e with most economists expecting double-digit growth in GDP. Historically, PV demand has witnessed stellar growth whenever GDP growth exceeded 7%%. The low base of Q1 FY2021 will optically result in an exceptionally high growth rate in FY2022, though FY2019-24 CAGR growth will remain modest at 3%-4%. As per ICRA, whether the industry will cross the earlier peak of FY2019 in FY2022 or not remains to be seen. The long-term industry growth drivers remain intact viz. relatively low penetration, weak public transport infrastructure, high financing penetration, favorable demographics and improving per capita income, urbanization and improving road infrastructure etc. What might affect growth are concerns like high fuel prices and inflationary environment which impact first time buyers, supply chain disruption which could impact production volume, steady increase in vehicle prices, especially in the backdrop of rising commodity prices, stricter emission/safety norms; and second round of Covid-19 wave being witnessed currently.

The semi-conductor shortage is a key challenge in Q1 FY2022 as the automotive industry accounts for 12% of global semiconductor demand. The stronger than expected recovery along with supply disruption at few manufacturing locations has aggravated chip shortage issues and some OEMs have experienced the impact on production volumes. Though some normalcy is expected from Jun-2021 onwards industry volume will be impacted during Q1 FY2022. India’s dependency on overseas suppliers for semi-conductor is likely to continue over the next 3-5 years.

Within the industry sub-segments, luxury car volumes are expected to clock over 25-30% growth in CY2021, after two years of decline. Luxury car penetration in India remains the lowest amongst large economies (US, China, Germany), thus there is long-term growth visibility. However; higher taxes on CBUs/CKDs is a key deterrent as local manufacturing is not viable due to low volumes.

Despite all odds, the compact SUV (C-SUV) segment which currently accounts for 31% of industry share YTD FY20201 has registered fifth consecutive year of growth in FY2021. The sedans, especially mid-size and executive segment (Rs 10-12 lakhs price bracket) will likely underperform due to cannibalisation from UV segment. The entry segment too will continue to shrink over the medium term. In line with ICRA’s expectations, the small car sales again fizzled out after short term momentum during Q2 FY2021. Preference for personal mobility and focus on cash conservation had resulted in outperformance of small car segment. But with better availability of finance and improvement in consumer sentiments, the shift towards the compact car and UV segment is expected to continue over the medium term, resulting in under-performance of small car segment.

Industry capacity utilisation has been fluctuating, from 50-55% in FY’20 to sub 50% in FY’21e and 55-60% in FY’22e. Most OEMs have surplus spare capacity with the exception of Kia, Hyundai and MSIL which are expanding capacity. As for capex, industry’s total investment outlay is estimated at Rs 28,000-33,000 crore during FY2022-FY2023; the incremental investments will primarily be for new product/platforms and emission/safety compliance. Investment could be accelerated depending on the incentive structure under PLI Scheme. The VW Group is expected to invest Rs 6,000 crore during FY2021-FY2023 period, primarily towards product development.

Recent trends indicate overall discounts have eased from all time high during H2 FY2020 though relatively they are still high on certain mid-sized sedans and diesel vehicles. The waiting period across select models is longer, up to 6 months. ICRA’s channel check suggests that financing pressure has eased from Jun/Jul 2020 level and financing penetration has increased in the last two quarters as customers prefer to conserve cash during uncertain time. In line with ratings firm’s expectations, delinquencies spiked during Dec 2020 but will moderate subsequently.

“As for the outlook, industry revenues are expected to grow over 25% in FY2022, supported by strong volume growth and higher realisation because of pass through of rising commodity prices. The profitability will be supported by improved operating leverage; OEMs as well as dealerships will witness margin expansion in FY2022. Nevertheless, increasing commodity prices will keep overall margin expansion at OEMs under check. Most OEMs have fairly strong balance sheet with net cash surplus position and their strong credit profile is well supported by their promoter groups. Thus debt levels are likely to remain modest at OEM level, though most dealerships continue to remain leveraged. On the regulatory front, safety & emission norms will continue to tighten with passenger airbags becoming mandatory from April 2021 onwards. Compliance with CAFÉ 2 norms and upcoming BS6 - RDE 2 compliance from April 2023 will require further investment by OEMs,” concluded Modani.