India's PV volume to cruise past 5 million in FY26 despite slow growth

As volume growth slows, original equipment manufacturers (OEMs) will rely on premiumisation and better product mix to protect margins

India’s passenger vehicle (PV) industry is set to scale a fresh high this financial year with the cumulative domestic and export volume crossing 5 million units even as annual growth slows to 2-4 per cent, according to a Crisil Ratings report published on Friday.

 

PV capital expenditure (capex) is expected to stay elevated at ₹30,000 crore this financial year as original equipment manufacturers (OEMs) ramp up capacity, accelerate electric vehicle (EV) investments, and push localisation, and digital upgrades.

 

This is the fourth consecutive year of record sales, although momentum has significantly eased from the 25 per cent surge in 2022-23 after the pandemic. “Utility vehicles (UVs) will drive volume growth this financial year, aided by new launches, easing interest rates, rising compressed natural gas (CNG) adoption, and rural tailwinds. That said, gains will be capped by weak adoption of EVs and sluggish sales of entry-level cars and sedans,” the report said.

 

As volume growth slows, OEMs will rely on premiumisation and a better product mix to protect margins. Softer input costs, better utilisation, and price hikes are likely to partly offset rising regulatory compliance costs, which will help maintain operating margin for the industry at 12-12.5 per cent this financial year, the report added. Healthy cash flows and a robust cash surplus will enable OEMs to fund their high capex comfortably, while keeping their balance sheets strong and credit profiles stable, a Crisil Ratings’ analysis of six PV OEMs, accounting for 90 per cent of the market, indicates.

 

The domestic market accounted for 85 per cent of the volume last financial year, with exports accounting for the rest. “PV growth will moderate to 2-4 per cent this financial year, but UVs will continue to cruise with 10 per cent growth, supported by new launches. With UVs contributing 68-70 per cent of volumes and bulk of upcoming models, the shift toward premiumisation is structural. Rural recovery, expected from a likely above-normal monsoon and reduction in interest rates, should improve demand for entry-level cars,” said Anuj Sethi, senior director, Crisil Ratings.

 

The fuel mix is also evolving rapidly. CNG-powered PVs are gathering pace, with their share likely reaching 15 per cent this financial year owing to low running costs and a fast-expanding network of over 7,000 refuelling stations.

 

Meanwhile, growth in EVs has slowed after doubling last year but on a low base. Despite a flurry of launches and declining battery costs, penetration is seen as moderate at 3-3.5 per cent, weighed down by high prices, modest charging infrastructure, and range anxiety, restricting the market to urban users as a second car option.

 

PV export growth is likely to moderate to 5-7 per cent in 2025-26, down by a third, amid global headwinds. The 25 per cent US tariff, effective from June, poses limited risk as the US forms just 1 per cent of total PV volumes.

 

OEMs can pivot to alternative markets such as Mexico, the Gulf countries, South Africa, and East Asia though ongoing geopolitical tensions could weigh on exports’ momentum.

 

Despite falling volume growth and stable input prices, OEMs have hiked prices 3-4 per cent to offset rising cost of technology upgrades and regulatory compliance. This, along with the better-priced UV mix, is expected to keep operating margins steady at 12-12.5 per cent, and ensure healthy cash flow from operations, and afford flexibility to address capacity constraints and support new product rollouts, it said.

 

“(The) high capex remains sustainable, backed by strong internal accruals and cash surplus, with capex-to-Ebitda (earnings before interest, taxes, depreciation, and amortisation) to steady at 0.5x,” said Poonam Upadhyay, director, Crisil Ratings.

 

The entry of global premium EV models, including Tesla would intensify competition in the premium segment, which accounts for less than 10 per cent of the overall volume, and will likely reset consumer expectations across categories, pushing Indian OEMs to accelerate technology upgrades. That said, the current high tariffs will limit imports.

 

Going ahead, the pace of interest rate cuts and EV adoption, as well as potential supply shocks could impact the availability of chips and battery cells amid global tensions, and will, therefore, bear watching, it added.