The dark clouds that have been hovering over the auto sector for the past couple of years are likely to subside in 2013-14, but only marginally so. The industry will remain on tenterhooks as subdued macro-economic conditions and persistent weakness in demand, among others, will keep sales and profitability under pressure across most segments.
Small car sales to fall further
Total passenger vehicle sales (cars, utility vehicles and vans) are likely to remain more or less flat in 2013-14, which is not much to shout home about considering that sales grew by just 2 per cent in the previous fiscal and 5 per cent in 2011-12. The slowdown in gross domestic product (GDP) growth, weak consumer sentiment, and continuous increase in ownership costs have clearly taken its toll on growth.
Small car sales are likely to fall by a couple of percentage points in 2013-14 due to continued uncertainty over income growth, high fuel costs arising from a deprecating rupee and still relatively high inflation.
Diesel cars will lose their sheen, particularly in the small car segment, due to the gradual deregulation of diesel prices and the expected fall in petrol prices.
By contrast, utility vehicle (UV) sales will be more buoyant at 6-8 per cent, but even that will be a steep moderation compared to the whopping 52 per cent growth recorded in 2012-13.
UV buyers are generally less sensitive than car buyers to increases in cost of ownership.
However, given the concerns over income growth, we expect the hike in taxes on UVs, the sustained mandated increase in diesel prices, and limited new model launches compared to 2012-13 to act as a dampener on growth.
CV sales to remain subdued
Domestic commercial vehicle (CV) sales are likely to grow by 1-4 per cent in 2013-14, compared with a 2 per cent decline in the previous fiscal. While medium and heavy commercial vehicle (M&HCV) sales are expected to recover gradually, with an improvement in fleet utilisation, we foresee a dramatic slowdown in light commercial vehicle (LCV) sales.
LCV sales have been highly resilient over the past 4-5 years; sales grew by 16 per cent in 2012-13 even as M&HCV sales slumped by 26 per cent. This strong increase in LCV demand can be attributed to new model launches, aggressive financing schemes and reduction in waiting periods with improved supply (particularly in the pick-up segment). We expect growth rates to taper off as excitement around financing options fades and the base effect catches up. Structurally, demand conditions are still weak with consumption growth being muted. We project LCV sales volumes to increase by 2-4 per cent in 2013-14, with pick-ups expected to continue to gain ground over sub-one tonne vehicles due to reducing price differential. M&HCV sales are expected to remain sluggish during the first-half and revive only in the second-half of 2013-14. Transporter profitability has been under pressure due to increase in diesel prices and weak demand, and they are likely to opt for purchasing new vehicles only when there is a sustained pick up in utilisation levels. We expect to witness this pick up towards the second-half of the year, as industrial output grows on the back of a normal monsoon and increase in spending by the government and consumers. Overall, we project M&HCV sales to remain flat in 2013-14.
In 2013-14, domestic two-wheeler sales growth is expected to recover to 6-8 per cent on the back of an improvement in urban and rural incomes, and stability in ownership costs.
The axis of two-wheeler demand is expected to continue to shift from urban to rural areas.
Expectations of a normal monsoon and growth in agricultural incomes are likely to boost growth in motorcycle sales by 5-7 per cent in 2013-14. On the other hand, domestic scooter sales will be driven by higher urban incomes and new model launches, growing at an above average 11-13 per cent.
Profitability, which was at a five-year low in 2012-13, will remain under pressure in 2013-14 due to subdued economic growth, feeble demand, and mounting competition. The recent depreciation in value of the rupee, which will increase input costs, further compounds the woes for the industry.
We believe competition will only increase in the years to come, as more international players enter India and the pace of innovation accelerates. This would elevate both R&D and selling and distribution costs, thereby impacting margins.
Despite these headwinds, India would continue to remain an attractive market, as volumes across segments are projected to grow at a five-year compounded annual growth rate (CAGR) of over 10 per cent.
The author is Director, Crisil Research, a division of Crisil.