Indian passenger vehicle industry’s domestic volumes may likely decline by 6-7% in 2013-14 but grow by 2-3% in 2014-15, as demand weakness continues to impact not just the small car segment (that accounts for 55-60% of industry volumes), but also the UV segment that had shown robust growth in 2012-13, says ICRA in its latest research update on Indian Passenger Vehicle Industry.
The industry operating margin is likely to be under pressure with weak volumes and reduced pricing power – leading to an estimated margin compression ranging between 150-400 bps during 2013-14, the agency said. The Indian Passenger Vehicle (PV) industry recorded volumes of 2.3 million units in 11m 2013-14, a decline of 6.0% YoY.
“This decline in volumes follows a moderate expansion in industry volumes by 5.1% and 2.2% in 2011-12 and 2012-13, respectively. The reasons for sluggishness in PV demand over the last three years are the oft-highlighted factors including high inflation, elevated interest rates and rising fuel prices that have exerted pressure on disposable income of consumers,” says ICRA in the report.
However, as many 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.
“The profitability metrics of industry participants too are unlikely to have any meaningful respite 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, (e) restricted pricing power in the wake of intense competition and (f) currency headwinds.”
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.
As per ICRA study, excise duty cut could lead to uptick in demand in next few months. ICRA survey interactions with various PV dealers indicate that enquiry levels haven’t gone up much since the excise duty reduction announcement. Still, we expect demand to see an uptick in the next few months given that (a) the excise duty sop is applicable only till June 30, 2014 which could lead to sales advancement to some degree; (b) around 40% of the industry’s sales are attributable to replacement demand, a segment of buyers that may choose to avoid postponement of their purchase decision further to capitalize on the currently available window of reduced PV prices. However, the excise duty cut may not give a significant fillip to either first-time buyers or from those looking to purchase an additional vehicle for the household till such time as disposable income growth recovers.
“The prevailing weakness in domestic PV demand has meant a relatively prolonged period of heavy discounts offered by Original Equipment Manufacturers (OEMs) on PV models across segments. However, as PV volumes declined by 9.3% YoY in January 2014, the OEMs in response have had to increase the level of discounts in February 2014 and March 2014.”
Overall the industry trend in favour of ‘push-sales’ through discounting rather than ‘pull-sales’ through advertisements and brand building seems to have got further entrenched during the current period of slowdown.
According to ICRA research discounts on several models are around 20-30% higher in March 2014 than they were in March 20131. Understandably, there are no discounts on some of the relatively newer models like Honda Amaze, Hyundai Grand i10, Ford Ecosport and Maruti Suzuki Celerio as a mark of marketing prudence obviating the need for below-the-line sales promotion spends.