Auto sales hit slow lane, but global companies line up new models

Global automakers MG Motors and Kia Motors are close to launching their first models in the Indian automobile segment, irrespective of the constant decline in passenger vehicles sales.

India's passenger vehicle (PV) market still remains highly under-penetrated compared with most developed economies and some developing nations, according to experts.

"As of fiscal 2019, India had around 22 passenger vehicles per 1,000 people. This is significantly lower than both developed nations and even other nations in the BRIC block (Brazil, Russia, and China). Hence, India holds tremendous potential for automobile manufacturers, including global automobile companies," Hetal Gandhi, director, Crisil Research, told DNA Money.

MG Motors, a subsidiary of China's SAIC, will launch its first vehicle Hector in India later this month with a high level of localised content. It was unveiled on May 15 and the company has already started accepting bookings for the upcoming premium SUV. Another global automobile company South Korea's Kia Motors will also launch its first car, Seltos, a sports utility vehicle, in next few months and is being showcased in June.

There have been few new launches by automakers including Hyundai - Venue, Toyota Glanza, Ford's new variant of Ecosport - Thunder edition etc.

However, the share of new launches in total sales have come down substantially over the years. According to data from Crisil, in 2018-19, new launches contributed 3% to new sales compared to previous two years, where it was in the range of 10-20% (this does not factor facelifts).

Sales of new models have supported the overall industry growth in the past five years. New model launches accounted for around 18% and 9% of sales in 2016-17 and 2017-18, respectively.

"New models have only accounted for around 3% in FY19, as OEMs came out with more facelifts than fresh model launches. Considering that new model launches have the potential to spur demand and help gain market share even in a subdued demand scenario, OEMs like Hyundai, M&M, Toyota and Tata Motors have undertaken new product launches in the past six months," Gandhi said.

Despite the decline in volume in the first quarter, the vehicle sales growth in this fiscal year is expected to be around 2-4% because of preponement of purchases, specifically from the taxi and cab-aggregator segment which have higher diesel vehicle usage.

For last year, the industry recorded a growth of 5% in sales, though PV domestic sales grew only 2.7%.

The first month (April) of the new fiscal recorded a 17% decline in passenger vehicle sales, a lowest in nearly eight years, according to data from SIAM. A liquidity crunch, pre-election uncertainty, high insurance costs have been among the key reasons for the decline.

In the last ten years, we have not seen anything like this when all the segments are down. The start of the new financial year has not turned out to be very good," SIAM deputy director general Sugato Sen had said in May.

Market leader Maruti Suzuki has cut vehicle production by over 18% in May, which is the company's fourth consecutive month of taking a production cut.

With the general elections behind and the impact of liquidity crisis waning, Crisil believes fresh model launches and benign fuel prices would aid demand growth from the second half of this fiscal.

Key reasons for the sales decline in the PV segment has been a significant increase in the cost of ownership for passenger cars over the past two years. In 2018, it was because of higher fuel which has continued in 2019 as well. Owing to higher raw material costs, OEMs also hiked vehicle prices, in addition to the increase in insurance costs by IRDAI, which had a compounding impact on the cost of ownership. All of these resulted in around a 13% increase in the cost of ownership in a two-year period, Gandhi said.

The second half of the current fiscal might turn out to be better as auto firms will look to sell off their BS IV inventory before April 2020, after which only BS VI compliant vehicles will be sold. More discounts could come in the way of consumers towards the end of this year, another expert adds.

Automakers need to ensure that inventory liquidation happens before April 2020, which will partially negate the impact preponement of purchase.

Once BS VI gets implemented, the price of a car can go up by 5-7% in 2020-21, and it will be even more for diesel than petrol variants. Also, small diesel vehicles may be withdrawn from the market.

Market leader Maruti has already announced that it will phase out all its small diesel vehicles next year.

Edelweiss in a research note said given that Maruti's product cycle has now converged with the industry trend, the PV growth is likely to stay muted. "The growth trend can swerve if -- macros turn supportive and/or new launches by industry (excluding Maruti) are successful... launch activity will now accelerate only after the implementation of BSVI norms."

Similarly, in a recent report, Subrata Ray, senior group vice president, ICRA, said, "The revenues for the industry are expected to grow by 10-11% in FY2020, driven by increased content per vehicle, supported by the transition to BS VI and mandatory safety norms despite muted volume growth for most automotive segments during FY2020. Operating margins will remain in the 13.75%-14.25% range in the medium term."

All this (the growth estimates) is on hopes of a normal monsoon, otherwise we will see a flat growth, ends Gandhi.