Auto sector to take a V-turn in FY25 on election winds, new models

Luxury car segment will continue to rise its EV penetration. However, the tipping point is still a few years away. Customers require convincing on ownership benefits and hassle-free experience

The automotive sector is expected to take a V-turn next financial year (2024–25, or FY25) as all vehicle categories step on the gas.

The automotive sector is expected to stay in top gear next financial year, driven by increasing disposable incomes, newer model launches, moderate hikes in vehicle prices, and tailwinds from elections.

Passenger vehicles

Passenger vehicle (PV) sales are projected to increase by 4-6 per cent in FY25, following an expected increase of 6–8 per cent this financial year (2023–24, or FY24).

Subdued sentiment continues to impact entry-level buyers due to economic constraints and increased costs, driven by regulatory factors; however, utility vehicles (UVs) continue to perform well.

 

The positive trajectory is further boosted by a focus on the mid-sport UV segment, timely upgrades of existing models, a diverse range of variants covering various price points, and increased financial penetration in the market.

PV revenue is projected to increase by 9–10 per cent on-year in FY25, while operating profitability should remain at 9.5–10 per cent, benefiting from the full-year benefit of recent price hikes announced by the original equipment manufacturers (OEMs) and consistently high volumes.

Total capital expenditure (capex) in FY25 is projected at Rs 15,500 crore, primarily geared towards new UV models, electric vehicles (EVs), fresh greenfield capacities by major players, and debottlenecking.

Commercial vehicles

Commercial vehicle (CV) sales growth is projected at 4-6 per cent in FY24 and 3-5 per cent in the next, driven by increased government spending and demand for replacement vehicles.

Key end-user sectors, particularly construction and mining, are expected to keep demand strong.

Realisations are expected to draw support from expected price hikes by CV manufacturers because of increasing input costs and regulatory changes. Medium and heavy CVs are expected to perform better than light CVs (LCVs) as the replacement cycle has already peaked in the latter.

That, along with steady operating leverage benefits, will keep operating profitability at 7-8 per cent in FY25.

Capex is expected at Rs 5,000–6,000 crore and will largely be towards EVs (mainly for LCVs and buses), maintenance, and adhering to various regulatory norms.

Two-wheelers

Two-wheeler sales should grow by 7-9 per cent in FY25, after 9-11 per cent growth in FY24, fuelled by a recovery in motorcycle sales and pent-up replacement demand.

Sales are anticipated to receive support from healthy urban incomes and a continuing shift towards premiumisation.

The upcoming 2024 elections have given financial activity, particularly in rural areas, a leg-up in the third quarter of this financial year.

The introduction of electric scooter models by OEMs is also driving up demand.

Revenue growth is projected to be 8–10 per cent in FY25, driven by higher realisations on the back of an increasing share of premium motorcycles.

Operating profitability is expected to sustain at 14–15 per cent in FY25, benefiting from premiumisation and higher realisations.

Capex is expected to remain at Rs 2,500–3,000 crore, largely towards EVs and maintenance.

Tractors

Assuming a normal monsoon, translating into healthy reservoir levels and positive farmer sentiment, domestic tractor sales are expected to grow by 5-7 per cent on-year in FY25.

Elections should fuel demand in the first quarter of the financial year, while anticipated healthy rainfall should lead to higher festival demand in the following quarters.

Replacement demand, which accounts for 50–60 per cent of sales, is expected to grow by 15 per cent on-year because of healthy sales in 2016–17 through 2018–19.

This financial year, however, domestic tractor sales are expected to decline by 2-4 per cent on-year because of an erratic monsoon (6 per cent below normal southwest monsoon) and negative farmer sentiment.

All eyes on electrification

The growth of EVs is expected to be driven by two- and three-wheelers, which account for more than 80 per cent of all vehicle sales.

Favourable cost of ownership, high demand for EVs in the delivery sector, and ongoing government subsidies at both the national level until March 2024 and state levels are likely to encourage more people to buy EVs.