2013-14 still a challenging year for car sales

The Passenger Vehicle (PV) industry’s domestic volume growth is expected to be around 2% in 2012-13, as small car segment that accounts for 55-60% of the industry’s volumes is likely to continue to grow at a rate slower than other PV segments, says ICRA in its latest update on the industry.

Most of the dealers with whom ICRA interacted recently have reported worrisome drop in customer enquiry rates and are accordingly less sanguine about demand recovery over the near term. The drop in enquiry rates has been observed both in urban markets as well as in smaller towns and rural areas, which portends a likely weak PV demand environment in 2013-14 as well, says ICRA’s report on PV industry.

 ICRA says that profitability metrics of industry participants will be impacted over the near term in view of (a) increase in expenses related to launch of new models, (b) increase in employee costs as several OEMs have announced substantial wage hikes, (c) likely sustenance of discounts-led sales push, and (e) restricted pricing power in the wake of intense competition. However, ICRA says that as some of the cyclical variables become less spiteful, the PV industry is expected to revert to a volume CAGR of 10-11% (domestic + exports) over the medium term.

Market share in the domestic PV industry still remains concentrated in the hands of few players, reflected in the fact that top four players account for 75% of industry volumes. This implies that profitability pressures on the relatively low volume players may be even higher resulting in sustained external financing dependence to fund losses and capital expenditure requirements, says the ICRA report on PV industry.

ICRA report stated that sales volumes in the Utility Vehicle (UV) segment have grown at 26% CAGR over the last three years (2009-10 to 2012-13E), much higher than the growth of 11% recorded by the domestic PV industry during this period. In the last two years, the UV segment’s volume growth has been even faster with volume growth of 16.5% recorded in 2011-12 (Vs 4.7% volume growth of the PV industry) and a still higher growth of 54.5% recorded in 11m 2012-13 (Vs 4.1% volume growth of the PV industry). With this, the share of the UV segment in the domestic PV industry increased from 12.6% in 2010-11 to 20.6% in 11m 2012-13.

In contrast, Passenger Car (PC) segment volumes have been sluggish, reflected in 2.2% volume growth in 2011-12 and minus (-) 4.6% YoY in 11m 2012-13. Within the PC segment, volume performance has been characterized by a wide dispersion in growth rates between petrol and diesel models. While diesel car volumes expanded by 37% in 2011-12 and 27% YoY in 11m 2012-13, petrol car sales have stopped short of being cataclysmic – 14% decline in 2011-12 and 17% YoY decline in 11m 2012-13.

The continued trend towards ‘dieselization’ of the PV industry as also the sustained run of strong volume growth of the UV segment has enabled the PV industry’s growth, by value, to be much higher than its volume growth. As per ICRA’s estimates, the industry’s growth (in value terms) in 2011-12 and 11m 2012-13, was relatively higher at ~13% and ~10%, respectively; against volume growth of 4.7% in 2011-12 and 4.1% YoY in 11m 2012-13.

The years 2011-12 and 11m 2012-13 were amongst the most challenging periods for the market leader Maruti Suzuki as it saw its market share slide sharply from 45.3% in 2010-11 to 38.9% in 11m 2012-13. The other key players who saw their market share dip in 11m 2012-13 were Tata Motors (market share down 1.9%) and General Motors (market share down 1.0%). The primary market share gainers over the last two years have been M&M (supported by volume expansion of Bolero and XUV500 models), Renault (strong customer response to Duster), Toyota (on the back of its new cars Etios andLiva, besides strong customer response for the Innova facelift) and Nissan (driven by scale-up in volumes of Sunny).

Since some of the among over 20 new PV brands launched like Toyota Liva, Honda Brio, Nissan Micra and Renault Pulse etc, launched in the Indian market have experienced lukewarm market response, the OEMs have been left with limited choices to sustain capacity utilization and one of the preferred option has been to look towards exports. Notwithstanding the above, the highly capital intensive nature of the PV industry, growing competition and a slow growing market have combined to add pressure on OEMs’ profitability.

Several OEMs including Hyundai, Toyota, Renault-Nissan and Volkswagen currently rely on imported diesel powertrains to produce their vehicles. Following the rapid shift in consumer preference towards diesel-run cars over the last two years, most OEMs have struggled to meet the strong demand for diesel-run cars. Accordingly, a bulk of the capacity expansion programmes of PV OEMs proposed over the next two years is oriented towards creation/ expansion of diesel engine capacity.

Between Maruti Suzuki, Hyundai, Renault-Nissan and Toyota, a capex of Rs 30 billion may be incurred over the next two years, to enhance diesel engine manufacturing capacity. This apart, select OEMs viz., Ford and Maruti Suzuki are at respective project stages towards setting-up Greenfield manufacturing facilities in Gujarat, which may involve a combined capex outlay of ~Rs. 120 billion over the next three years. A majority of the above capex is being done keeping in mind the strong medium term growth opportunities offered by the domestic small car segment, besides the strong exports potential. While the above capex figures may appear daunting given the current environment wherein demand remains sluggish, these investments may be necessary for the industry to gear up with adequate capacity when domestic demand recovers.

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