Banks to spoil buyers' dream purchase, to keep car loan interest rates high: Fitch Ratings

Reuters Posted online: Friday, Nov 15, 2013 at 0000 hrs
New Delhi : Fitch Ratings expects demand for passenger vehicles in India to remain weak through the first half of 2014 because banks will keep car loans pegged at quite high interest rates. Weak consumer sentiment is also set to play a part in the fall in car sales.

The tepid demand has been evident in the October-November 2013 festive season, which has so far bucked the trend of increased sales seen in previous years.

Passenger vehicle sales fell by 7.1% y-o-y during the January-October 2013 period, largely driven by the 10.5% drop in car sales. Although utility vehicle sales increased 7.6% during the same 10-month period, that was due to strong sales early in the year.

Sales of diesel-powered utility vehicles have been declining in the past six months as the differential between petrol and diesel prices narrowed, excise duties in most segments increased, and high interest rates choked consumer borrowing. Utility vehicle sales have fallen in spite of launches of popular new models in the last 12-15 months.

The passenger car segment continues to face challenges from the high cost of ownership and slowing economy, which has resulted in poor consumer sentiment, especially in urban centres. This is reflected in the flat sales registered by the top two car manufacturers that account for about 70% of the passenger car market - Maruti Suzuki Limited and Hyundai Motors India Limited - in the October festive season. Fitch expects the challenging environment to continue to hurt sales in the near term, while rising competition and heavy discounting may erode manufacturers' profitability.

Sales of commercial vehicles shrank 13.5% y-o-y in January-October 2013. Sales volumes for medium and heavy commercial vehicles fell by 28.7% y-o-y over the 10-month period and light commercial vehicles by 3.9%, with the decrease accelerating towards the end of the period.

Fitch expects the demand for light commercial vehicles to remain weak through the first half of 2014 and improve marginally thereafter. As a result, the agency expects the earnings and profitability of commercial vehicle manufacturers to be impacted significantly. While the weak commercial vehicle market and increasing competition will impact the standalone financial profile of Tata Motors Limited (BB/ Stable), the strong performance of its subsidiary Jaguar Land Rover PLC (BB-/Stable), which makes premium cars, will mitigate the impact.

Fitch believes that two-wheeler market will be the only segment to register marginally positive demand growth in the near term. Sales of two wheelers increased by 18% in September and October 2013. The recent volume growth has been driven by improving rural demand and stronger demand for scooters in urban centres.

The good rains during the year are likely to result in improved agricultural productivity, which will drive growth in rural demand for two wheelers, although sales will likely increase at a slower pace.

(The above statement was released by the rating agency)