Implementation of the Seventh Pay Commission recommendations will result in a double-digit jump in the sales of cars, especially mini and the compact hatchbacks, said Credit Suisse in a report.
The sale of mini or the entry level cars has not been as per expectations in the recent months due to unseasonal rains. The report sees the overall automobile sector growing, but expects the entry level cars to gain the maximum as the number of employees whose income is below Rs 40,000 a month now will significantly go up. These are the potential customers for the mini and the compact cars.
The biggest beneficiary is likely to be Maruti Suzuki as the company is the leader in entry level segment with models like Alto, Wagon R, Celerio and Swift. Carmakers like Hyundai will also see an increase in the volumes especially with Eon and i10 at the entry level and the hatchback segment.
The report said, “The Seventh Pay Commission recommendations would result in almost 25% of the central government and 20% of state government employees becoming eligible car buyers, earning over Rs 40,000 a month. This would make almost 3 million employees a target segment for Maruti.”
For the last one year, car manufacturers have experienced tepid growth, except market leader Maruti Zuzuki. India’s largest passenger vehicle manufacturer Maruti Suzuki saw volumes of the Alto and Wagon R fall 28% to 34,336 units from 47,618 units in June. The compact cars constitute 33% of the total volumes of Maruti Suzuki.
The report noted the Sixth Pay Commission which was implemented in August 2008 resulted in almost a 10-fold increase in Maruti’s sales to government employees from FY08-12. The share of sales to the government employees in this period rose from 2% to 15%. After Maruti Suzuki, the second largest carmaker Hyundai is also expecting a double-digit volume growth.
Rakesh Srivastava, a senior vice-president (sales and marketing), Hyundai India, said, “Our experience is that it leads to an increase in the disposable income which will aid car sales. In the past, it has led to a double-digit growth and the same is expected this time as well. Every segment will see growth but the small car market will grow significantly.”
This is a welcome development for the automobile sector which is yet to recover from the slowdown of the last 2-3 years. It will create a huge demand for cars and small cars are set to gain. Customers look to upgrade from two-wheeler to cars at this juncture. Companies with a products in the small car segment will benefit, said Abdul Majeed, partner, Pricewater houseCoopers.