Commercial (CV) and passenger (PV) vehicles will continue to drive recovery in India’s automotive sector volume in FY23, a recent report by research firm CRISIL stated. However, two-wheelers and tractors are expected to underperform once again, it added.
As per the report, CV and PV volume are expected to grow 18 percent and 12 percent, respectively in FY23. The CV and PV volume rose 26 percent and 13 percent, respectively in the last fiscal FY22.
Meanwhile, two-wheelers are forecasted to see a modest sales growth of 6 percent in FY23 after a 10 percent cut last fiscal and tractor volume growth is likely to be flat or in the low single-digit in FY23 compared with a 6 percent decline in the last fiscal, noted CRISIL.
“CV demand growth, particularly for medium and heavy commercial vehicles (MHCVs), is expected to be backed by replacement demand because of improved utilisation and profitability of fleet operators, and government spending on infrastructure. Light CVs will be propelled by a surge in e-commerce and better last-mile connectivity, while demand for buses will be driven by the gradual reopening of schools and offices, and the easing of mobility restrictions," said Says Pushan Sharma, Director, CRISIL Research.
However, overall CV demand, despite double-digit growth last fiscal, and likely this fiscal, will still be 16 percent below the 2019 level, Sharma further informed
Meanwhile, PV volume will be driven by the easing of chip shortages, particularly in the second half, as capacity additions by chip manufacturers come onstream, helping clear the sizeable order backlog built over the past six months.
After a major fall during the COVID pandemic, the Nifty Auto index has managed to recover a bit on the back of a rise in demand. The index has been in-line with the market performance, rising 8 percent in the last 1 year against an 8 percent rise in Nifty.
In this period, the CV and PV constituents can be seen performing better than two-wheelers. Tata Motors and M&M rose the most, up over 30 percent each followed by Maruti Suzuki, up 16 percent. Meanwhile, 2-wheeler stocks including TVS Motor and Eicher Motors added around 10-12 percent in this time.
CRISIL further noted that going ahead, two-wheelers sales is expected to register a modest recovery after declining for three successive fiscals, driven by the opening up of educational institutes and improved mobility.
However, like last fiscal, a sharp increase in the total cost of ownership and petrol prices will weigh on demand, it added.
Volume this fiscal will likely be supported by healthy farm income, driven by higher crop prices in case of a normal southwest monsoon, as predicted by the Indian Metrological Department. However, the volume would be a massive 28 percent lower than in fiscal 2019, informed CRISIL.
“We expect higher volume and easing commodity prices in the second half to ease the pressure on profitability of original equipment manufacturers (OEMs) this fiscal. With variable cost accounting for about 85 percent of overall cost, the sharp surge in commodity prices, especially steel, combined with modest volume growth, has led to OEMs absorbing a significant part of the cost inflation," said Naveen Vaidyanathan, Director, CRISIL Ratings.
He added that operating margins are likely to improve to 9-10 percent this fiscal from an expected record low of 8 percent last fiscal but will remain well below the 12.5 percent average during 2017-21.
The research firm, however, added that any resurgence in Covid-19 cases, continuing semi-conductor shortages, and the progress of monsoon will bear watching in the road ahead.