India's passenger vehicle industry to post 22-25% growth in FY22: ICRA

As per an ICRA research, the growth will be achieved on a lower base of Q1FY21, primarily due to industry slowdown and the pandemic impact.
Passenger cars in a showroom
Passenger cars in a showroom
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India's passenger vehicle (PV) industry is likely to post a growth of 22 to 25% in FY22, after a 2-4% de-growth in FY21, ratings agency ICRA said on Tuesday. As per an ICRA research, the growth will be achieved on a lower base of Q1FY21, primarily due to industry slowdown and the pandemic impact.

Besides, expected pick-up in economic activity, improved consumer sentiments, resilient rural income sentiments, healthy crop cycles and several government initiatives will propel growth, ICRA said. Further, the agency noted that shift towards personal mobility from public transport in the present pandemic-laden scenario will also help the sector.

Amongst the various PV industry sub-segments, the utility vehicle (UV) segment is likely to post impressive growth and will outperform the rest of the industry, ICRA said. However, sedans, especially mid-size and executive segment will likely underperform due to cannibalisation from UV segment. The entry level segment too will continue to shrink over the medium term, ICRA said.

Other sub-segments like luxury car volumes are expected to clock over 25-30% growth in CY2021, after two years of decline.

"The V-shaped economic recovery has boosted consumer sentiments from lows of June'21 quarter even though it still remains lower than previous (2019) levels. Consumer sentiments are one of the key indicators for non-discretionary purchases like cars and luxury goods," said ICRA's Vice President Ashish Modani.

"Demand has remained strong post the festive seasons as both retail and wholesale dispatches witnessed recovery. The industry clocked the best-ever volume during H2 FY2021, primarily driven by inventory restocking and pent-up demand. Also, as demand sentiments improved, discounts offered during the lean phase eased substantially. The industry's outlook continues to remain stable."

On the macro economic scenario, the agency said that India is expected to be amongst the fastest growing large economies during FY2022 with most economists expecting double digit growth in GDP. Historically, PV demand has witnessed stellar growth whenever GDP growth exceeded 7%.

According to ICRA, the long-term industry growth drivers remain intact viz. relatively low penetration, weak public transport infrastructure, favourable demographics and improving per capita income, urbanisation along with road infrastructure.

"What might affect growth are concerns like high fuel prices and inflationary environment which impact first time buyers, supply chain disruption which could impact production volume, steady increase in vehicle prices, especially in the backdrop of rising commodity prices, stricter emission or safety norms; and second round of COVID-19 wave being witnessed currently," ICRA's research report said.

Furthermore, it cited semiconductor shortage as a key challenge in Q1FY22 as the automotive industry accounts for 12% of global semiconductor demand. "The stronger than expected recovery along with supply disruption at few manufacturing locations has aggravated chip shortage issues and some OEMs have experienced the impact on production volumes," ICRA said.

"Though some normalcy is expected from June 2021 onwards, industry volume will be impacted during Q1 FY2022. India's dependency on overseas suppliers for semiconductors is likely to continue over the next 3-5 years."

In addition, the report pointed out recent trends which indicated that overall discounts have eased from all time high during H2FY20 though relatively they are still high on certain mid-sized sedans and diesel vehicles. The waiting period, it said across select models is longer, up to six months.

"As for the outlook, industry revenues are expected to grow over 25% in FY2022, supported by strong volume growth and higher realisation because of rising commodity prices. The profitability will be supported by improved operating leverage; OEMs as well as dealerships will witness margin expansion in FY2022," concluded Modani.

"Nevertheless, increasing commodity prices will keep overall margin expansion at OEMs under check. Most OEMs have fairly strong balance sheet with net cash surplus position and their strong credit profile is well supported by their promoter groups."

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