Easing supply and pent-up demand to boost auto sales: A CRISIL analysis

Chip shortage, the second wave of Covid-19 infections, and higher ownership costs have constrained what could have been a strong recovery in automobile sales this fiscal, on a low base. 

Next fiscal year, however, pent-up demand, easing of demand-supply challenges, inventory build-up, sustained economic recovery and better finance availability should drive healthy volume growth. 

While passenger vehicle (PV) sales growth is expected to moderate to 11-13 per cent this fiscal year because of chip shortage, volumes are expected to grow a stronger 12-17 per cent next fiscal year, supported by pent-up demand and low inventory with dealers.  

Commercial vehicle (CV) volumes are expected to rise 20-22 per cent this fiscal, aided by economic recovery and the government’s infra spending. 

Next fiscal year, CV demand is expected to improve 13-18 per cent as freight demand and financing improve. 

In light commercial vehicles (LCVs), though, chip shortage and the second wave have restricted significant improvement.

As for two-wheelers (2Ws) and tractors, sales are expected to decline 1-3 per cent and 6-8 per cent respectively this fiscal. This is because the cost of ownership of 2Ws has increased significantly (27 per cent) over the past four years on account of regulatory and emission norms and higher fuel prices, which have dampened buying sentiment. And tractors are expected to see muted sales this fiscal due to a high base, advancement of replacement sales in fiscal 2021 ahead of emission regulations, and delayed harvesting and sowing amid uneven rainfall. 

Next fiscal, 2W sales are expected to grow 6-11 per cent per cent on pent-up demand, while tractor sales should drive up 1-6 per cent riding on improvement in crop prices, higher farm profitability, sustained government support for procurement of foodgrains, and a pick-up in commercial demand.

Penetration of electric vehicle (EVs) is expected to reach as high as 4-8 per cent in 2Ws, 1-2 per cent in PVs and 3-5 per cent in buses next fiscal year, compared with 1 per cent in the last. In goods-carrying CVs, penetration will lag due to unviable cost economics. 

The credit outlook for original equipment manufacturers (OEMs) remains ‘stable’ this fiscal, driven by strong balance sheets and liquidity surpluses of most players, notwithstanding headwinds in certain automobile segments and high raw material prices denting operating profitability. 

The credit outlook for OEMs is expected to remain ‘stable’ next fiscal as well. Higher volumes will lead to better coverage of fixed costs. Moreover, the full benefit of price hikes taken in phases this fiscal should support improvement in operating margins next fiscal. While OEMs will continue to invest in R&D and new launches, new capacity addition will be limited, given sufficient headroom in existing capacities. Improved business performance and modest capital spending should benefit the debt metrics of players, especially those of CV OEMs. PV, 2W and tractor OEMs will also continue to sustain and benefit from historically strong balance sheets.