“The overall automotive industry witnessed some volatility during the first quarter of FY18, as the market experienced uncertainty post the BSIV transition issues and prior to GST implementation, and automakers, besides offering pre-GST discounts, made efforts to re-align inventories. However, revival of consumer sentiment post demonetization, low interest rates, attractive discounts and expectations of a normal monsoon provided support to the industry.
Passenger vehicle (PV) sales grew 4.4% during the quarter, primarily driven by a strong demand for SUVs and compact cars during April and May, despite an 11% decline witnessed in June. The growth came on the back of new model launches, commissioning of new manufacturing plants (leading to a reduction in waiting period), pre-GST discounts, and pick-up in rural demand due to prediction of a healthy monsoon and farm loan waivers in large states. However, the rate of growth during the quarter was dampened by mixed reactions towards GST, with a significant decline in sales during June, as automakers realigned inventory across dealerships to avert losses during transition to GST. The growth rate in the PV market is likely to accelerate going forward. We expect an overall sales growth in low teens during FY18, owing to reduced vehicle prices as a result of GST, expectations of a good monsoon season, new model launches and low fuel prices as well as financing costs.
Medium and heavy commercial vehicle (M&HCV) sales witnessed a significant decline during the quarter, owing to the effect of pre-buying of BS-III vehicles in March, and rise in prices of BS-IV vehicles coupled with global supply constraints of fuel injection pumps for BS-IV engines. Further, the existing oversupply of National Permit truck fleets and uncertainty around GST, pushed the fleet operators to postpone purchases. However, the segment showed some signs of improvement in June, as the industry started recovering from the pre-buy effects of BS-III vehicles. Moving forward, M&HCVs are expected to return to their path of growth during the latter part of the year with the effects of demonetization gradually wearing-off, along with the government’s focus on infrastructure development.
Light commercial vehicles (LCVs) continued to grow, primarily driven by replacement demand and signs of a good monsoon. Going forward, LCVs are likely to witness stronger growth, driven by continued replacement demand and stronger demand from consumption-driven sectors and e-commerce companies. Overall CV industry is expected to witness 5% – 7% growth in FY18, on the back of infrastructure and rural sector development, passenger carrier segment, potential implementation of a scrappage program and the positive impact of GST on the logistics sector in driving the emergence of hub and spoke model. The implementation of GST is expected to drive freer and faster movement of goods across states. However, one would hope that the objective of GST does not get defeated as individual states come up additional levies.
The two wheeler industry reported 7.8% growth during the quarter as it recovered from the impact of demonetisation. The demand, however, witnessed some moderation as a result of pre-buying due to the BS-III ban. Also, the month of June saw mixed results, as consumers delayed purchases due to uncertainty around GST. Scooters, which were primarily sold in urban areas, have also expanded customer base to semi-urban areas. The two wheeler segment is likely to witness a growth of 8%-11% in FY18, with expectations of a good monsoon, rural spending schemes by the government (allocation of INR1.8 trillion for rural, agriculture and allied sectors), and personal income tax reduction in the low-income slab. The GST implementation is expected to benefit the mass market, as manufacturers have already reduced prices in the <350cc segment.
We expect the Indian automotive market to witness growth in several pockets in FY18, driven by a good monsoon, lower interest rates, strong rural economy and smooth implementation of the GST pushing automakers to offer price cuts on vehicles. With the GST regime kicking in, luxury cars and SUVs are expected to witness an impetus, due to a considerable reduction in taxes. A key risk would be increased levy of Registration Taxes by State Governments, which is outside of the GST scope. In the medium term, the industry is likely to invest heavily in upgrading products, as it lays strong focus on meeting upcoming regulations related to emissions and safety. With an increased push towards electric vehicles (EV) from the government, industry participants are looking to invest in the area – including new product and infrastructure development, and partnerships with fleet operators to push EV sales. Overall we expect a strong H2 in FY18 given the overall positive macroeconomic outlook and rationalization of taxes post GST.”
