Overall passenger vehicle (PV) sales will grow 9%–10% on-year next fiscal year to 50 lakh units, scaling a new all-time high, according to an analysis by CRISIL. This will be ~20% above the pre-pandemic peak of 40.5 lakh units and will also be the highest ever sales achieved by the domestic PV original equipment manufacturers (OEMs).
According to CRISIL, healthy order books driven by pent-up demand and higher incomes, especially for sport utility vehicles (SUVs), and easing availability of semiconductors, will support domestic growth even as export growth remains sluggish. The healthy volume growth, together with moderating commodity prices, will enable better operating leverage, helping original equipment manufacturers (OEMs) offset the increase in costs incurred in complying with new regulations.
Consequently, the operating margin is expected to improve to 9%–10% next fiscal year from 8.0%–8.5% this fiscal year. Better cash generation and the sizable cash surpluses will support the funding of increased capital expenditures by OEMs as they set up additional capacity, including for electric vehicles (EVs), obviating the need for material debt addition. For the current fiscal year, domestic PV volume growth is estimated at 24%-26%, driven by pent-up demand and a large order backlog because of the semiconductor shortage last fiscal year.
In the first 10 months of this fiscal year, domestic sales accounted for 85% of PV volume and exports the balance. Anuj Sethi, Senior Director, CRISIL Ratings, said, “Domestic PV sales volume should grow 10%-12% next fiscal, led by SUVs, which are set to nearly double their share in overall domestic sales to ~55% from ~28% in fiscal 2018 (see chart 1). Sharper focus of OEMs on SUVs, including compact SUVs, fuelled by customer preference, is driving growth, even as sales of sedans and entry level passenger cars remain sluggish.” “Export growth is expected at a subdued 2%-4%, mainly due to restrictions on repatriation of foreign exchange and high inflationary trends in key export markets,” he added.
“EVs are growing at a strong rate displaying over 170% growth over the last two years through fiscal 2022, albeit on a low base, supported by tax incentives offered to boost their adoption. Yet, their overall share in PV sales remain at relatively low levels of just about 1% currently. Meanwhile, the prices of key raw materials steel, aluminium, and rubber, which remained high until the first half of this fiscal, have moderated over the past five months. This, together with multiple price hikes by OEMs and strong volume growth, will drive up operating margin by 100-200 basis points (bps), to 9-10% next fiscal, despite higher costs for components being installed for regulations,” said the report.
Naren Kartic. K, Associate Director, CRISIL Ratings, said, “The credit profiles of OEMs rated by us have remained stable despite lower volumes during the pandemic, due to their strong balance sheets and healthy liquidity. With demand sentiments remaining healthy, OEMs have resumed creating a pipeline for future launches, including EV models.” “Hence, capital spending is estimated to increase ~54% to ~Rs 27,000 crore in fiscal years 2023 and 2024 compared with the previous two fiscal years. Still, healthy cash generation and a strong liquid surplus will ensure external borrowings remain low.”