The automotive industry in India will see the commercial vehicle and passenger vehicle segments will drive recovery in the industry this fiscal, while two-wheelers and tractors are expected to underperform once again says a report by Crisil.
The research estimates that CV and PV volume could grow 18percent and 12percent, respectively in FY2023, after rising 26 percent and 13 percent, respectively over the last fiscal. The two-wheeler segment will see a modest sales growth of 6 percent after a 10 percent drop last fiscal, while tractor volume growth is expected to be flat or in the low single-digit compared with a 6 percent decline.
Pushan Sharma, director, of Crisil Research said, “CV demand growth, particularly for medium and heavy commercial vehicles (MHCVs), is expected to be backed by replacement demand because of improved utilisation and profitability of fleet operators, and government spending on infrastructure. Light CVs will be propelled by a surge in e-commerce and better last-mile connectivity, while demand for buses will be driven by the gradual reopening of schools and offices; and the easing of mobility restrictions. That said, overall CV demand, despite double-digit growth last fiscal, and likely this fiscal, will still be 16 percent below fiscal 2019 level.”
In terms of the passenger vehicle segment, the volumes will be driven by the easing of chip shortages, particularly in the second half, as capacity additions by chip manufacturers come onstream, helping clear the sizeable order backlog built over the past 6-months. Besides, inventory build-up from the current low of 15-20 days to the normative levels of 30-35 days will account for about a third of the incremental volume.
Coming to the two-wheeler segment it is expected to register a modest recovery after declining for three successive fiscals, driven by the opening up of educational institutes and improved mobility. However, like last fiscal, Crisil expects a sharp increase in the total cost of ownership and petrol prices to weigh on demand. Consequently, the volume would be around 28 percent lower than in fiscal 2019.
The tractor segment will be bogged down by high-base effect. While volume had declined last fiscal, it was still on the back of an all-time high of fiscal 2021, when purchases had surged following reverse migration of labour following the pandemic, and farmers redirecting savings from fewer social events. Volume this fiscal will likely be supported by healthy farm income, driven by higher crop prices. It presumes a normal southwest monsoon, as predicted by the Indian Metrological Department.
Naveen Vaidyanathan, director, Crisil Ratings said, “We expect higher volume and easing commodity prices in the second half to ease the pressure on profitability of original equipment manufacturers (OEMs) this fiscal. With variable cost accounting for about 85percent of overall cost, the sharp surge in commodity prices, especially steel, combined with modest volume growth, has led to OEMs absorbing a significant part of the cost inflation. Operating margins — likely to improve to 9-10 percent this fiscal from an expected record low of around 8percent last fiscal, will remain well below the 12.5 percent average during fiscals 2017-21.”
The report states that strong balance sheets and modest debt have helped OEMs buttress the impact of profitability pressures and sustain their credit profiles in the recent past. Higher accrual driven by better revenue and a slight improvement in operating profitability will support higher capital expenditure by OEMs, including for enhancing electrification, and will keep credit profiles ‘Stable’ over the medium term.
Any resurgence in Covid-19 cases, continuing semi-conductor shortages, and the progress of monsoon will bear watching in the road ahead.