Compact SUVs continue to grow for five consecutive years: ICRA report

Despite all odds, the compact sport utility vehicle (C-SUV) segment, which currently accounts for 31 per cent of the industry share year-to-date (YTD) FY21, has registered a fifth consecutive year of growth this fiscal.

The sedans, especially in the mid-size and executive segment (₹10-12 lakh price bracket), will likely underperform due to cannibalisation from the UV segment, indicated a report by ICRA research, on Tuesday.

The entry segment, too, will continue to shrink over the medium term. In line with ICRA’s expectations, small car sales again fizzled out after short term momentum during the second quarter of FY21.

Preference for personal mobility and focus on cash-conservation had resulted in outperformance of the small car segment. However, with better availability of finance and improvement in consumer sentiments, the shift towards compact car and UV segment is expected to continue over the medium term, resulting in under-performance of the small car segment, it said.

“As for the outlook, the industry revenues are expected to grow over 25 per cent in FY22, supported by strong volume growth and higher realisation because of pass through of rising commodity prices. The profitability will be supported by improved operating leverage – original equipment manufacturers (OEMs) as well as dealerships will witness margin expansion in FY22,” Ashish Modani, Vice-President at ICRA, said.

Rise in commodity prices

Nevertheless, increasing commodity prices will keep overall margin expansion at OEMs under check, he said adding that most OEMs have fairly strong balance sheets with net cash surplus positions and their strong credit profile is well supported by their promoter groups.

“Thus, debt levels are likely to remain modest at the OEM level, though most dealerships continue to remain leveraged. On the regulatory front, safety and emission norms will continue to tighten, with passenger airbags becoming mandatory from April onwards. Compliance with CAFÉ 2 norms and upcoming BS6- RDE 2 compliance from April 2023 will require further investment by OEMs,” Modani said.

The report further said the industry capacity utilisation has been fluctuating from 50-55 per cent in FY20 to sub-50 per cent in FY21 (estimated) and 55-60 per cent in FY22 (estimated). Most OEMs have surplus spare capacity with the exception of Kia, Hyundai and Maruti Suzuki India which are expanding capacity.

Investment outlay

As for capex, the industry’s total investment outlay is estimated at ₹28,000-33,000 crore during FY22-23. Incremental investments will primarily be for new product/ platforms and emission/safety compliance, it said. Investment could be accelerated depending on the incentive structure under the PLI Scheme. The VW Group is expected to invest ₹6,000 crore during FY21-FY23 period, primarily towards product development, it said.

In terms of sales, the ICRA report said the passenger vehicle (PV) industry is expected to post an impressive growth of 22- 25 per cent for FY22, after a two-four per cent de-growth in FY21. The growth will be on a lower base of first quarter FY21, primarily due to industry slowdown and the pandemic impact.

In addition to the lower base, expected pick-up in economic activity, improved consumer sentiments, resilient rural income sentiments (less impacted by pandemic), healthy crop cycles and several government initiatives will propel growth.

The shift towards personal mobility from public transport in the present pandemic 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, the report said.

The industry clocked the best-ever volume during the second half of FY21, 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, Modani said.

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/safety norms; and second round of Covid-19 wave being witnessed currently, he said.

The semiconductor shortage is a key challenge in the first quarter FY22 as the automotive industry accounts for 12 per cent 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. Though some normalcy is expected from June 2021 onwards, industry volume will be impacted during first quarter FY22. India’s dependency on overseas suppliers for semiconductor is likely to continue over the next three-five years, the report added.

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