India Ratings and Research (Ind-Ra) has maintained a stable outlook on the auto sector for this financial year, mainly driven by moderate annual volume growth of 6-9 per cent for passenger vehicle (PV) segment. This will be despite an expected slowdown in the commercial vehicle (CV) segment, Ind-Ra said in a report here. Growth in the PV segment is likely to be driven by utility vehicles (15-20 per cent), the car segment (3-5 per cent), while the van segment is expected to remain tepid at up to 2 per cent. The slowdown in the CV segment is expected to be on account of a 9-12 per cent decline in medium and heavy commercial vehicles (MHCVs), partially offset by a 6-9 per cent growth in light commercial vehicles (LCVs), it added. Inconsistent Index of Industrial Production (IIP) trend, along with the depletion of replacement demand is expected to lead to a decline in MHCV volumes in 2017-18.
However, LCV volumes are likely to continue to be supported by demand for last mile transportation triggered by a surge in online retail sales, it added. The rating agency expects domestic scooter volume growth to remain close to the 2016-17 level at 15-18 per cent and lower than the previous years due to the base effect. Ind-Ra said if there is a normal monsoon, motorcycle volumes are likely to recover slightly over April-December 2016 growth level of 6.3 per cent with increased currency in circulation, leading to a demand revival in 4Q of FY17 and 18.
The November 2016 demonetisation adversely impacted the auto industry, primarily the sale of 2W, although the impact might be restricted to FY17, it said. Vehicles and models with significant sales volumes in rural areas were largely impacted due to demonetisation, given the higher cash transactions in rural areas than urban areas. Consequently, sales of motorcycles, scooters, vans and certain UV models have been impacted, it said.
Meanwhile, the implementation of the Goods and Services Tax (GST) might benefit the auto industry and companies engaged in manufacturing in terms of significant reduction in logistics and supply chain costs, it said. However, these benefits would be partly offset by the increase in effective tax rate for compact PVs to 28 per cent from the minimum current level of 25.5 per cent. In case of large luxury cars, the effective tax rate under the GST is 40 per cent plus cess, which would broadly match the prevailing effective tax rate, it added.