Proper implementation of the seventh pay commission recommendations on existing salaries of the central and the state government employees will result in a double digit increase in auto mobile sales especially the mini and the compact hatch back segment.
The mini or the entry segment cars has not been performing in the recent months due to the unseasonal rains and availability of superior products in the compact hatchback segment at an affordable price. If the central and the state government implement the 7th pay commission recommendations then it would provide a much needed fillip to the segment.
Though growth will be seen across segments, the entry level cars will gain the maximum traction as the number of employees whose income is below Rs 40000 is significantly more than the one who are above it. These are the potential customers for the mini and the compact cars.
The biggest beneficiary will be Maruti Suzuki as the company is the leader in entry level car segment with the help of its offerings Alto, Wagon R, Celerio and Swift. Car makers like Hyundai will also experience increase in the volumes especially with Eon and i10 at the entry level and the hatch back segment.
Swiss investment banking firm Credit Swiss in a report said, “The 7th Pay Commission recommendations would result in almost 25% of central government and 20% of state government employees becoming eligible car buyers, i.e., monthly pay of Rs 40,000 per month. This would make almost three million employees a target segment for Maruti. Assuming a 10% conversion rate, it would mean sales of an extra Rs 300,000 per annum translating into extra 10% growth for the industry.”
For the last one year the passenger 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 decrease by 28% to 34,336 units from 47,618 units in June. The compact cars constitute 33% of the total volumes of the Gurgaon based car maker.
The report also noted that the 6th Pay Commission which was implemented in Aug-08 resulted in almost a 10x increase in Maruti’s sales to government employees from FY08 to FY12. The share of sales to government employees rose in this period from 2% to 15% of sales. Maruti Suzuki did not want to comment as the first quarter financial results will be out on July 28.
After Maruti Suzuki, the second largest car manufacturer Hyundai is also expecting double digit volume growth as a result of the development.
Rakesh Shrivastava, senior vice president (sales and marketing), Hyundai India, said, “Our experience is that it leads to increase in disposable income which will aid passenger vehicle sales. In the past it has led to double digit growth and the same is expected time as well. Every segment will see growth but the small car market will grow significantly.”
This is a welcome development for the India automobile sector which is yet to fully recover from the slowdown of the last 2-3 years.
It will create a huge demand for vehicles in the market and the small cars are set to flourish as consequence which will benefit car makers like Maruti Suzuki and Hyundai. 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, PricewaterhouseCoopers.
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