Passenger vehicle (PV) volume will ascend to a new peak for the third straight time next fiscal, growing 5%-7% on a high base of 6%-8% estimated for the current fiscal, as sport utility vehicles (SUVs) race ahead even as demand for cars and exports remains muted, says a research note.
In the report, CRISIL Ratings says healthy volume growth of the SUV segment, which enjoys a higher margin, will steer an improvement in operating margin to 11.5%-12.5% next fiscal.
Anuj Sethi, senior director of CRISIL Ratings, says, "While the overall PV volume is seen rising 5%-7% next fiscal, we expect demand for SUVs to accelerate at twice the pace at over 12% driven by an array of feature-laden launches at competitive price points, varied technology options including hybrid and electric, and increased access to credit."
An analysis by CRISIL Ratings of six PV-makers, accounting for over 80% of the market, indicates as much.
According to the rating agency, a significant change in consumer preference has cranked up demand for SUVs, leading to its market share doubling to about 60% of total domestic volume this fiscal from around 28% before the pandemic in fiscal 2019 (see chart above). "This preference is expected to grow further backed by a healthy pipeline of new model launches across price points, including electric variants, and normalised availability of semiconductors after a prolonged period of short supply."
In contrast, CRISIL says demand for cars is also seen slowing this fiscal year due to the ongoing weakness in the rural market and lower affordability at the entry-level. The cost of vehicles has risen in the past three to four years as manufacturers have been passing on higher commodity prices and have had to comply with more stringent regulations on safety and emissions.
The situation is similar on the exports front, the rating agency says, adding, "The share of PV exports is estimated to have slowed to 14% this fiscal compared with around 17% in fiscal 2019, mainly due to inflationary headwinds and limited availability of foreign exchange in key export markets - Latin America, south-east Asia and Africa - in the past two years. This trend is expected to continue next fiscal."
But the increasing share of SUVs with higher realisations, along with stable commodity prices and the full benefit of price hikes executed last fiscal, have resulted in operating margin expansion of manufacturers by about 200bps (basis points) to around 11.0% this fiscal. A further improvement in the sales-mix in favour of SUVs can take that number to 11.5%-12.5% next fiscal year, the report says.
According to Naren Kartic K, associate director of CRISIL Ratings, capacity utilisation is expected to peak at around 85% this fiscal and, given that strong demand for SUVs is continuing, PV-makers are incurring about Rs44,000 crore capex (capital expenditure) in fiscals 2024 and 2025—almost double compared with the past two fiscals. "But healthy cash accrual and surplus will ensure reliance on external borrowings remaining low, keeping the credit profiles of manufacturers in the CRISIL Ratings portfolio stable."
"Better cash generation, along with strong balance sheet and robust liquidity, will support funding of sizeable capital expenditure to set up additional capacity, obviating the need for material debt addition and keeping credit profiles of PV makers stable," the report says.
The rating agency expects key debt metrics of CRISIL-rated manufacturers — debt to earnings before interest, tax, depreciation, amortisation, and interest cover — to remain robust at less than 0.1 times and over 40 times, respectively, in this and the next fiscal year.
"In the road ahead, commodity price movements, changes in interest rates, the impact of monsoon on rural demand, inventory level with dealers and global macroeconomic conditions will be monitorable," it added.
