Over the past two fiscals, the COVID-19 pandemic has changed the dynamics of many an industry. The passenger vehicles segment is one such. During the past fiscal, passenger cars priced Rs10 lakh (Rs1 million) and above sold five times faster than the cars in the lower price segment, says a research note.
In the report, CRISIL Ratings says, "The key reasons for this were a stark difference in income sentiment of the respective target consumers, a sharper rise in the prices of lower-end cars, fewer options as some manufacturers exited the segment, and a slew of new launches that have increased the preference for higher-priced cars."
In India, typically, lower-priced cars are bought by first-time users or those upgrading from used cars. With the pandemic impacting the income sentiment significantly for entry-level car buyers, purchases and upgrades have been getting postponed, it added.
According to the rating agency, while supply-chain issues have affected many vehicle manufacturers, counter-intuitively, models priced higher than the entry-level have continued to find buyers.
Last fiscal, cars priced above Rs10 lakh or the premium segment sold five times faster than those with lower sticker prices and notched up about 38% growth compared with around 7% growth for the latter. Consequently, the market share of premium cars rose 500 basis points (bps) to 30% last fiscal, compared with 25% in fiscal 2021.
CRISIL Research estimates the employee cost of large and medium companies — a proxy for income sentiment among affluent buyers of the higher-priced car — has increased way more than those of small and medium-sized companies which, typically, account for a larger proportion of lower-priced car buyers.
"On top of muted income sentiment, there has been a 15-20% cumulative increase in the sticker price of lower-end cars over the past four fiscals due to increased stringency of safety regulations, like mandating anti-lock braking system (ABS), front row airbags, speed warning alarms, seatbelt reminder, rear parking sensors, and crash test norms and the transition to Bharat Stage (BS)-6 emission norms. These have been a drag on sales," the rating agency says.
According to the report, consumer preference has been gradually shifting from low-priced models that did well previously to similarly priced utility vehicles (UVs). Some are even preferring to buy a used car in the costlier segment than spend an equivalent amount for a lower-segment car.
Sales of best-selling low-priced vehicles such as Maruti Suzuki's Alto, Swift, Baleno, Vitara Brezza, Celerio, and Dzire; and Hyundai's i10 and i20, which cumulatively accounted for about 56% of the lower-priced cars sold in fiscal 2019, have been on a decline for three fiscals now.
There were only 39 models of lower-priced cars available last fiscal versus 54 in fiscal 2016.
Additionally, the lower-priced cars segment had little to show with new launches since fiscal 2020, contributing to only 15% of volume share within lower-priced cars in fiscal 2022, CRISIL points out.
The drive was different for higher-priced cars, it says. Bestselling models such as Hyundai Creta, Maruti Ertiga and Ciaz, Mahindra Bolero and Scorpio, Honda City, Ford Ecosport and Toyota Innova, which cumulatively accounted for about 68% of the higher-priced cars sold in fiscal 2019, have witnessed a decline in sales since fiscal 2019.
However, according to the rating agency, the new launches have outperformed filing in the gap; though number of models available was stable at 53-55, new launches since fiscal 2020 contributed significantly to the overall sales volume in the segment.
"As many as 19 of them racked up 32% of volume share within higher-priced cars in fiscal 2022. The higher priced new models doing well are Kia Seltos, Maruti XL6, MG Hector, Mahindra XUV700 and Hyundai Alcazar," it added.
Similarly, over the past five-six fiscals, two-wheelers priced over Rs70,000 have consistently sold more than those that cost less. The reasons for this are a 40%-45% increase in the cost of ownership and a 50%-55% increase in the cost of acquisition since fiscal 2015.
According to CRISIL, the cost of ownership has risen significantly because of tighter regulatory norms (safety and BS-VI—Bharat Stage-VI) and price hikes by vehicle-makers to offset higher input costs, which has materially dampened consumer sentiment and offtake of lower-priced two-wheelers.
"Vehicle makers have also been focusing more on the higher-priced segments because of changing consumer preference. In fiscal 2015, the lower-priced segment had 29 models; today, it has 12. On the contrary, models in the higher-priced segments have risen from 71 in fiscal 2015 to 93 last fiscal, propelling sales," it says.
CRISIL expects the share of higher-priced cars to remain higher at 30% versus 25% previously due to the resilient incomes of affluent buyers and traction for new models.
"Similarly, the share of higher-priced two-wheelers will remain above 40% because of increasing consumer preference and the availability of more models," it concludes.