According to a report by CRISIL Ratings, India’s passenger vehicle (PV) sales are expected to grow 9-10% in the next fiscal year, reaching a new all-time high of around 50 lakh units. This growth is expected to be driven by pent-up demand and higher incomes, particularly in the sport utility vehicle (SUV) segment, and the easing availability of semiconductors. It will also be supported by the moderating prices of key raw materials, which will help improve operating leverage and offset the increase in costs incurred due to new regulations. The report suggests that the operating margin of original equipment manufacturers (OEMs) is expected to improve to 9-10% next fiscal year from 8.0-8.5% this fiscal year. The healthy volume growth, along with the already sizeable cash surpluses, will support funding of increased capital spend by OEMs as they set up additional capacity, including for electric vehicles (EVs), without the need for material debt addition.
The report highlights that domestic PV sales volume is estimated to grow 10-12% next fiscal year, led by SUVs, which are set to nearly double their share in overall domestic sales to ~55% from ~28% in fiscal 2018. OEMs are focusing on SUVs, including compact SUVs, as customer preference is driving growth, while sales of sedans and entry-level passenger cars remain sluggish. The report expects export growth to remain subdued at 2-4%, mainly due to restrictions on repatriation of foreign exchange and high inflationary trends in key export markets.
EVs are growing at a strong rate exhibiting over 170% growth over the last two years through fiscal 2022, albeit on a low base, supported by tax incentives offered to boost their adoption. However, their overall share in PV sales remains at relatively low levels of just about 1% currently.
The prices of key raw materials, such as steel, aluminium, and rubber, have moderated over the past five months, which, together with multiple price hikes by OEMs and strong volume growth, will drive up operating margin by 100-200 basis points (bps) to ~9-10% next fiscal year, despite higher costs for components being installed for regulations.
The report notes that the credit profiles of OEMs rated by CRISIL Ratings have remained stable despite lower volumes during the pandemic, due to their strong balance sheets and healthy liquidity. With demand sentiments remaining healthy, OEMs have resumed creating a pipeline for future launches, including EV models. Hence, capital spending is estimated to increase ~54% to ~Rs 27,000 crore in fiscals 2023 and 2024 compared with the previous two fiscals. Still, healthy cash generation and strong liquid surplus will ensure external borrowings remain low.
In conclusion, the report suggests that India’s PV market will continue to grow in the next fiscal year, driven by pent-up demand and higher incomes in the SUV segment, the easing availability of semiconductors, and moderating prices of key raw materials. OEMs are expected to improve their operating margins and increase their capital spend without the need for material debt addition, given their strong balance sheets and healthy liquidity. The report highlights that improved semiconductor availability, rural sentiments driven by agriculture yield, interest rate movements, and inflation will remain monitorables, and major disruptions in the EV space are unlikely given the slow addition of charging infrastructure, but this could gather pace over time.
