Despite intermittent volatility, markets have rallied since 2014 on high growth expectations from the economy. But while acceleration in growth still remains tentative in many pockets, the auto sector is one space which has seen promising sales. Heavy truck and bus sales have convincingly turned around from the slowdown years of 2012-13 and 2013-14. Small truck volumes, too, have picked up in recent times. Scooters are showing steady growth while the outlook for cars and bikes is upbeat.
What has fuelled the strong show in various segments of the auto industry in the last two years? And, with a lot of recent happenings impacting the industry — be it the ban on certain kinds of diesel vehicles imposed in the last few months, the GST Bill going a step closer to reality last week, the upcoming changeover to BS 1V fuel norms across the country or the Seventh Pay Commission awards — what are the levers for further growth or risks thereto from hereon?
In top speed Nothing truly represents the cyclicality of the auto industry as sale of trucks and buses (called Medium and Heavy Commercial Vehicles or MHCVs). This is because CVs, especially trucks, are used for transport of goods and agricultural produce, and for industrial/infrastructure purposes such as mining, and haulage of construction material. Hence, the demand for new CVs depends on the economic cycles of boom and bust. Secondly, new CV sales also depend on the interest rate cycle, with any dips in borrowing costs tilting the scale in favour of new CV sales. Positive sentiment on both these counts saw sale of MHCVs pick up in the last two years.
After an increasing trend in the key policy rate (repo rate) in 2013 and a neutral stance in 2014, the RBI began cutting rates in early 2015. This lifted sentiment as it signalled that interest rates had peaked out. Reform measures initiated by the Modi government in sectors such as mining and revival in road building activity helped push up MHCV demand. Fleet operators saw merit in replacing older vehicles or adding to their fleet in anticipation of higher industrial activity. Lower diesel prices from a rout in crude oil made it economical for transporters to carry goods and encouraged fleet replacement or expansion as well. Consequently, sale of MHCVs moved up by 16 per cent in 2014-15 and by 30 per cent 2015-16 over the respective previous years. The low base of the earlier years helped, too. Following stellar growth after the global economic slowdown of 2008-09, MHCV sales had hit a trough in 2012-13 and 2013-14. Volume growth in these two years witnessed a 23-25 per cent fall in each of these two years, compared with the respective previous years. Hence, pent-up demand for replacement of old vehicles also kicked in.
With the upturn in heavy vehicles firmly in place, the sale of Light Commercial Vehicles (LCVs) used for last-mile connectivity, gathered steam in the last few months too. LCVs ended 2015-16 with a marginal 0.30 per cent growth, after the fall in volumes in the two previous years. Volume growth has gained further traction in the first three months of this year.
Sanguine outlook After two years of high growth, MHCVs may probably take a breather this year, though they may continue to see good offtake. As against the 30 per cent volume growth last fiscal, growth has moderated to 14.5 per cent for the April-June 2016 period. The Society of Indian Automobile Manufacturers (SIAM) forecasts MHCVs to grow by 12-15 per cent in 2016-17 but companies such as Ashok Leyland peg the growth at a higher 15-20 per cent.
Also, with BS IV emission norms rolling out pan India in April 2017, vehicles are expected to become costlier as compliance with higher emission norms involves a technology upgrade. Hence, pre-buying of older trucks is also expected to keep demand for CVs strong in the second half of the year. What works in favour of new truck sales is also the recent instances of activism by the National Green Tribunal. The NGT recently ordered de-registration of diesel vehicles that are over 10 years old in Delhi. With LCVs still in the early days of a turnaround, demand in this segment is expected to gain further steam this year as well. In sum, CV sales will cruise along in the next one year, with no big hurdles to growth. That said, with the country moving closer towards a Goods and Services Tax (GST) regime last week, CV sales may dampen in fiscals 2017 and 2018 if GST is implemented by then. Efficiencies in inter-State movement of goods could reduce travel and turnaround time for trucks, bringing down the need for fleet expansion. Over the long term, though, higher economic growth from this one nation-one tax regime will increase freight demand and, hence, the demand for trucks.
On an upturn In line with the cyclical upturn seen in CVs, passenger car sales volumes moved up by 5 per cent and 8 per cent, respectively, in the last two fiscals, after showing a 5 per cent fall in volumes in 2013-14. A loosening of purse strings by urban customers, coupled with successful launches, helped renew interest in cars. But what really stands out in the passenger vehicles segment is the expanding demand for utility vehicles (UVs).
Consider this. In 2012-13, when sales in other segments such as cars, trucks, bikes, etc., were slowing down after three years of high growth earlier, UVs showed a 52 per cent growth in volumes.
In 2013-14, UVs continued to show a growth of 5 per cent despite the high base. In fiscals 2015 and 2016, too, UV sales grew at a steady 5-6 per cent. Sales have become more brisk in the first three months of this fiscal. In other words, UV sales have not seen any dip since the global economic crisis year of 2008-09.
With most UVs running on diesel, 2012-13 was a time when the price differential between petrol and diesel was at a high. While petrol prices were linked to the prevailing market prices, diesel prices were still administered by the government and were hence cheaper during this period.
Diesel prices hovered between₹40 and ₹50 a litre ( Delhi, Mumbai, Kolkata, Chennai) in 2012-13 while petrol prices were anywhere in the ₹67-78 a litre range across these metros. Lower running costs and higher mileage prompted many customers to opt for these diesel vehicles. The government has since decontrolled diesel prices. But the momentum that picked up in 2012-13 has continued. By 2015-16, share of UVs in total passenger vehicle sales has steadily moved up to 21 per cent, from 12 per cent in 2010-11. Most of this demand has been driven by a new sub-segment in this category loosely called ‘compact UVs’. While these vehicles have the muscle of any other bigger SUVs, they are offered at price points lower than them, making it attractive to customers.
The Society of Indian Automobile Manufacturers classifies these vehicles as those with length less than 4,400 mm and available in the price range of up to ₹15 lakh. Launches that have tasted success in recent times such as the Duster, Ecosport, Creta, SX4 S-Cross, Vitara Brezza, TUV300 and KUV100 belong to this category. In 2015-16, sales of vehicles in this compact UV segment constituted almost two-thirds of the total UV sales.
Some headwinds Given that many UVs run on diesel, recent punitive measures by the government and the NGT might wean customers away from UVs. In December 2015, the NGT banned sale of diesel vehicles with engine capacity of over 2000 cc in Delhi and the National Capital Region in a bid to control pollution. This ban has affected sales of UVs such as the Scorpio, Bolero, XUV 500 and Rexton from Mahindra and Mahindra and the Innova and Fortuner from Toyota in that region.
Fear that this NGT ban may be imposed in other big cities, the introduction of higher infrastructure cess on diesel and big vehicles in the Budget in February 2016, the clampdown on older diesel vehicles by the NGT and the narrowing gap between the prices of diesel and petrol may all shift customers away from diesel-run UVs in the near to medium term.
Driven predominantly by recent launches such as the Vitara Brezza , Creta and KUV100, UV sales have seen a 38 per cent volume growth in the first quarter of this fiscal. While this growth rate may not carry through till the end of the year, compact UVs may, nevertheless, be a bright spot in this segment.
The bets on cars to do well are high with improved rural demand from normal monsoon and higher urban disposable incomes from the Seventh Pay Commission awards. SIAM forecasts passenger vehicles to show 6-8 per cent growth this fiscal.
What may support growth over the medium term is lower incidence of indirect taxes on many vehicles, once the GST regime kicks in.
Pockets of growth Like UVs, scooters too have defied the cyclicality of the auto industry and brought in good volumes for the last few years. Be it the downturn years since 2008-09 or the upturns, scooters have consistently recorded double-digit volume growth. Even as truck sales recovered in fiscals 2015 and 2016, motorcycles in the commuter and executive segments (upto 150cc engine capacity) faced headwinds from lacklustre rural demand. But scooter sales volumes grew by 25 per cent and 12 per cent, respectively, in these two years.
That the scooter market is in early to mid stages of growth compared to the more mature market for bikes/motorcycles has aided high growth in this segment. Thanks to this steady upswing, scooters have slowly been gaining a larger share of the two-wheeler pie. Since 2009-10, the share of scooters in total two-wheeler sales (scooters, motorcycles, mopeds) has steadily moved up from 15 per cent to double that currently.
Secondly, unlike bikes, riding a scooter has also been made simpler with the introduction of the gearless models. Crowded traffic conditions, poor connectivity through public transport, availability of storage space in the vehicle, increasing number of women drivers, style and unisex appeal have all been driving demand for these gearless scooters, especially in urban areas. Being immune to factors such as availability of disposable income or cheap finance to fund new vehicle buys, sale of premium bikes also flourished in this period. For instance, sale of Royal Enfield bikes which operate in the premium category has been on fourth gear for several years now, defying the cyclicality seen in the commuter and executive bikes.
Great expectations The two-wheeler segment is expected to fire on all cylinders in fiscal 2017. The market for premium bikes is expected to expand further while scooters will continue their good run. SIAM forecasts a volume growth of 17-19 per cent in scooters this year.
A lot of action is expected in commuter and executive bikes too, thanks to the beneficial impact of good monsoon and Seventh Pay Commission on disposable incomes in both the urban and rural areas. The positive sentiment is already visible in the sales for the first three months of this fiscal. Motorcycle volumes grew by 9 per cent in this period, compared with -0.24 per cent in the twelve months ended March 2016. As the GST rolls out, bikes are expected to become cheaper as well.
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