ICRA optimistic on passenger vehicle sales this year

The industry's profitability metrics however face several headwinds like increased product development expenses, increase in employee expenses, says the ratings agency

The Indian passenger vehicle (PV) industry’s domestic volumes are expected to grow by 8.5-9.5 per cent this year, supported by the return of first-time buyers and  replacement demand, owing to the large base of earlier years.

“While there are some concerns related to the two to four per cent additional infrastructure cess, the expected pick-up in the economy, a favourable monsoon and benefits of the 7th pay commission will support overall growth in the domestic PV sector,” said research and rating agency ICRA.

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Over the past two financial years, domestic PV growth has primarily been supported by new launches in the compact, super compact and compact utility vehicle segment. While the share of the overall UV segment has remained flattish (about 21 per cent), the share of compact UVs in overall UV sales has increased to 63 per cent.

"Considering aggressive launches, we expect both these segments to outperform overall industry growth in the near to medium term," said ICRA.

In 2015-16, the PV segment grew nearly eight per cent to 2.02 million units. The UV segment grew six per cent to 586,000 units from 2014-15, according to data from the Society of Indian Automobile Manufacturers.  Profitability, however, faces issues such as increased product development expense, increase in employee expenses,  likely sustenance of discount-led sales push resulting from restricted pricing power and commodity price volatility, says ICRA.  

After a sharp contraction in sales between financial years 2013 and 2014, the medium and heavy truck segment of the domestic commercial vehicle (CV) segment grew 21 per cent and 32 per cent, respectively, in the past two financial years.

The growth in this segment has been driven by replacement-led demand from large fleet operators after two years of deferment and improving viability on declining diesel prices and firm freight rates.

“While diesel prices have corrected by almost 20 per cent since September 2014, freight rates have declined by only four to five per cent. Our channel check with fleet operators confirms that demand for road logistics has improved and this along with reduction in diesel prices has come as a relief for the logistics industry,” said ICRA.

It expects medium and heavy CV (truck) sales to grow 13-15 per cent in this year, on replacement-led demand, some pre-buying ahead of the complete rollout of BS-IV emission norms (by April 2017) and "gradual improvement in viability on the back of lower diesel prices and pick-up in consumption-driven sectors”.