Indian Automotive Market in 2015

The Indian automobile industry, the sixth largest automobile producer in the world, is one of the potential future markets in the world. The Indian automobile market has grown from a seller dominated market in the 1980’s to a consumer dominated market today. The auto industry of the India has grown substantially and further is expected to grow at a CAGR of more than 10% over the period of next 7 years. Indian automobile industry is well positioned in terms of demography and geography as it can service both domestic demands as well as cater to the increasing demand in export markets. This rise of the automotive industry can be attributed to various factors like growing economy, rising prosperity, increasing disposable income among consumers, easily accessible finance options, and an increase in the working population of the country.

The Indian automobile industry can be categorized under four different categories:

1.        Two-Wheelers,

2.        Three-Wheelers,

3.        Passenger cars & Utility Vehicles (UVs),

4.        Commercial vehicles and tractors.

The two-wheeler segment can be further sub divided into mopeds, scooters, motorcycles and electric two-wheelers. Major share of the Indian automobile industry is taken by two-wheelers followed by passenger cars and the share is almost equal between commercial vehicles and three-wheelers. The major contribution to the vehicle production comes from Southern India, accounting for 35% of the total production.

The year 2014 started on a high note with double-digit forecasts, but is likely to end with an abysmal sub 2-3% growth. Reduced excise duty earlier in the year and the formation of a stable government did give the sentiment a push, but sporadic sales growth was driven by barely a few players like Maruti Suzuki, Hyundai Motor India and Honda Cars India. The automobile industry has pinned its hopes on falling fuel prices and interest rates, and stalled infrastructure projects getting the go-ahead  - all of which may pump up the economy.

The key areas of expectation in 2015 are growth in the next one to two quarters, announcement of key safety and emission regulations, implementation of regulations and the goods and services tax.

Here’s a quick look at the key factors that the industry has pegged its hopes on: 

Fuel Prices

Fuel prices are on their way down, and for the first time in five years, running cost has come down in 2014.
Global crude prices have fallen by 40% from the highs in June, compelling oil marketing companies in India to pass on the benefits. The result: The cost of vehicle ownership has fallen by 3% this fiscal.
Historically, a decline in the cost of ownership has led to a spike in passenger car volume growth. In FY04, FY07 and FY10, the cost of car ownership dropped by 9%on an absolute basis, resulting in passenger car volume growth growing by over 20%.

“Savings on account of a reduced fuel bill, falling food inflation and interest rates will swell a common man’s disposable income by at least Rs 5,000-6,000. This saving is good enough for a person who has been waiting to buy or upgrade a car.

The price difference between petrol and diesel has almost halved to Rs 10.82 in Delhi in December 2014 from the peaks of Rs 19.91 at the beginning of January 2013. The switch in favour of petrol-driven cars has already begun.
For now, overall fuel economics looks good and is expected to drive demand, but the decreasing price gap between petrol and diesel fuel is bringing strains to car manufacturers for what direction to choose from here.

The New Motor Vehicle Act

The New Motor Vehicle Act is expected to change the way people drive. The final draft is expected in the first quarter of 2015.

The ministry of road transport and highways hopes to curb road accidents, ensure 4% GDP improvement on account of increased efficiency and safety and create 10 lakh jobs in the transportation sector. By enforcing technologies like intelligent speed adaptation, driver alert control and eye drowsiness detectors, it hopes to prevent at least 2 lakh road accident deaths in the next five years, besides imposing hefty penalties and jail terms. An independent agency will handle vehicle regulation and road safety, as per the draft. The ministry claims that the bill is in sync with practices in advanced nations like the US, Canada, Singapore, Japan, Germany and the UK.

But the demand from industry for an old vehicle replacement policy may not be coming in soon, minus the infrastructure to scrap old vehicles.

On the emission front, the new CAFE standard is likely to come into effect by April 2017.
Under the new regulation, the ministry is trying to promote innovation and adoption of new technology, provide for lead time for industry to adopt new standards and improve vehicle design for safer travel. On the safety front, the government is likely to make airbags mandatory for cars, which may take vehicle costs higher by at least Rs 20,000.

New Launches

New launches saved the day for most car makers in 2014, and the market will be further spoilt for choice in 2015.

If the current year belonged to compact sedans, 2015 will be a year of utility vehicles. At least 25 launches are expected next year. With the entry of new players, the market will be segmented further. Segment leader Mahindra & Mahindra aims to create a new entry price for sports utility vehicles with its Micro SUV, S101, at Rs 4-6 lakh, while Japanese carmaker Nissan will launch its affordable MPV Datsun Go+ for families.

Maruti SuzukiBSE 1.29% will be launching its S Cross — India’s first true blue crossover — at around Rs 10 lakh, while its South Korean rival Hyundai Motor will launch its ix25 compact SUV to take on Ford Eco-sport and Renault Duster.

On the passenger car front too, the action is across price points and segments. While Renault plans to bring in first global entry-level car, A Entry, its alliance partner Nissan will be introducing the Datsun Redigo. Tata MotorsBSE 1.82 % wants to be back in the reckoning with an automated manual transmission (AMT) Nano, apart from another small car and compact sedan.

Ford India will look at shedding the tag of a one-product company by launching two new cars to complement its its SUV Ecosport. Hyundai’s Elite i20, which has been a runaway success, will face some heat from arch-rival Maruti Suzuki with a new car codenamed YRA, while its old nemesis Honda Jazz makes a comeback in a more affordable form. And then, a range of affordable AMT options on the Nano, Renault A Entry, Datsun Redigo, Maruti Suzuki Dzire and Ertiga and Wagon R brands are being considered.

While there are options across every category, customers will have access to better options at fairly the same price on account of the heavy competition.

Path to Profitability

If GDP growth picks up in FY16 on par with projections, 2015 may just turn into a watershed year for Indian auto companies. Operating margins have remained depressed for the past three years on account of low capacity utilisation (60%) and record high discounts of 6-7% of sales.

However, volume growth is expected to hit the high single digits to nearly double digits for passenger vehicles next year, improving the quality of earnings for auto companies. According to analyst estimates, a 10% improvement in volumes could lead to a 300 basis point expansion in margins.
Barring General Motors India, most other passenger carmakers are expected to see significant improvement in operating profit margins. Companies like Maruti Suzuki and Hyundai will strengthen margins on higher volumes and a richer product mix, while exports will improve the financials of companies like Volkswagen, Fiat and Renault Nissan. Here’s how car companies will benefit: With increased capacity utilisation, the fixed overhead per unit will dip, leading to higher margins. Also, with first-time car buyers graduating to mid-size compact cars in urban areas, the average realisation will improve. And as the economy perks up, companies can go easy on discounts.

Carmakers such as Honda and Ford are likely to turn EBITDA-positive in the coming year, thanks to improved capacity utilisation led by new models and higher localisation.

How will Carmakers Fare Without Excise Sops?

The government has decided not to extend the excise benefit, which expires on December 31.

The duty benefit had helped car makers stay afloat by extending offers to consumers and pushing sales. However, now that the support is withdrawn and other costs moving up, the prices are likely to go up by Rs 8,000 to Rs 36,000. This may actually dissuade customers waiting to close their purchase.

Interest Rates

With wholesale inflation nearing zero, there is a sustained pressure on the Reserve Bank of India (RBI) to cut rates. Falling interest rates could prove to be one of the key drivers of volume growth next year. Historically, low interest rates have coincided with high passenger car volume growth.

Low interest rates play a key role in the consumer’s buying decision. “Every Indian who can afford to buy a car has a housing loan… Savings, on account of a rise in disposable income, are good enough for a person who wants to buy a car to close the purchase.

If vehicle interest drops to 11.5% from the current 12.5% for a loan of Rs 1 lakh for five years, the equated monthly instalments will come down to Rs 2,199 from Rs 2,249. While the market is betting on a 50 basis-point reduction in rates, Srivastava of Hyundai says a 100 basis -point reduction is needed for interest rates to have an impactful response.

Rural Sales

Rural sales have proved to be the backbone of the automobile industry during the past few years, with players like Maruti, Hyundai, M&M posting double digit growth from the interiors of the country.
But with rains playing truant this year, the demand for motorcycles and tractors has already started falling. Car sales have so far have remained buoyant.

Most of the factors that have spurred rural demand all these years, such as a good monsoon, more yield per hectare, higher minimum support prices and lower input cost are now pushing lower, resulting in rural consumers turning risk averse.

A lower minimum support price (MSP) for crops this year is seen as the main culprit in slowing rural consumption. Some state governments have not announced a bonus over and above the MSP, which has reduced the net payoff for the farmer.

Fortunately, the initial feelers don’t seem to be indicating a decline for all. Market leaders Maruti Suzuki and Hyundai Motor India among others, are continuing to see growth in the hinterland, with new regions opening up.
India has 6,50,000 villages and barring Maruti Suzuki and M&M, only a few companies capture even a tenth of these markets.

Give them roads and they will give you growth. Increase in infrastructure spend with 100 smart cities in rural areas can give you growth.

Hybrid & Electric Vehicle Policy

The National Electric Mobility Mission plan for 2020, initiated by the previous regime at the Centre, promised much but delivered little.

The new government, though, is moving towards taking the policy ahead. The expenditure finance committee has already approved Rs 800 crore for the project while the heavy industry ministry is waiting for the green signal from the finance ministry, which may come in the next fortnight. The government is likely to begin pilot projects across six to eight cities.

Chetan Maini, chief executive officer of Mahindra Reva is hopeful of the policy coming through in the early part of 2015. “The NBEM (National Board on Electric Mobility) 2020 holistically looks at demand creation (through subsidies), research and development support and infrastructure build-up. The key is the early implementation,” he says.

With stringent emission norms and dependence on fossil fuels expected to reduce in future, development of hybrid and electric vehicles is a given, says Pareek of Tata Motors. “India is home to affordable, frugal engineering — if India can be home to affordable cars, why not affordable hybrids?” he says.

But the role of the government is critical, he says. “There has to be a huge focus on infrastructure and research and development in order to make these concepts work.”