India Ratings & Research (Ind-Ra) has revised its outlook for the automobile industry to stable to negative from stable. This is the first time in six years that the agency has revised its outlook for the sector.
The outlook reflects the structural weakness in the passenger vehicle (PV) segment in terms of high capacity additions and intensifying competition which may potentially become entrenched in the industry structure. The agency expects the segment production capacity to increase to 6.5-6.7 million units by FY16, up 33%-37% from FYE13. This, amid weakening drivers of demand, does not portend well for such capital intensive sector.
Enhanced competitive intensity would prevent margin expansion (essential for improving the cash margins and credit profile) with domestic PV players likely to be impacted the most. All original equipment manufacturers (OEMs) in the industry will have to resort to frequent model upgrades for retaining market share.
Ind-Ra expects domestic PV volumes to fall by 5%-12% in FY14, led by the likely yoy decline in car volumes of 8%-15%. The agency believes the reduced demand for PVs is part of the overall slowdown in consumer discretionary spending.
Sales of utility vehicles (UVs), the driver of PV sales in FY13, have slowed down from April 2013, following an increase in excise duty to 30% from 27% in March 2013. Price conscious buyers opting for UVs in the sub INR0.7m price range (which accounts for significant proportion of segment volumes) appear to be deferring purchases as they are also faced with steadily increasing diesel prices.
Exports to Provide Limited Support: Export volumes of PVs have shown a steady growth in the past three years given the low base. However, most of these exports have traditionally been targeted at other emerging markets, mostof which are facing muted domestic activity. Weak demand for cars from importing nations in 2013 and 2014 could compel foreign OEMs to target higher sales in the Indian market thereby exacerbating competition and pricing pressure.
Scale Tilting towards Petrol Variants: ... the price difference is likely
to reduce with the government permitting monthly hikes in diesel prices from January 2013. This will erode the key incentive to purchase diesel cars.
