PV volume to rise by 5-7%, touch new peak in next fiscal: CRISIL report

Passenger vehicle (PV) volumes are expected to log 5-7 per cent growth, touching a new peak for the third straight time in the next fiscal driven by the SUV segment, credit rating agency Crisil said on Monday.

This anticipated growth is expected to come on the back of an estimated high base of 6-8 per this financial year even as demand for cars and exports remain muted, it said.

A significant change in consumer preference has cranked up demand for SUVs leading to its market share doubling to around 60 per cent of total domestic volume this fiscal from around 28 per cent before the pandemic in fiscal 2019, the ratings agency said.

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, it said.

"While the overall PV volume is seen rising 5-7 per cent next fiscal, we expect demand for SUVs to accelerate at twice the pace at over 12 per cent, driven by an array of feature-laden launches at competitive price points, varied technology options including hybrid and electric, and increased access to credit," said Says Anuj Sethi, Senior Director at CRISIL Ratings

In contrast, Crisil said, demand for cars is seen slowing this fiscal too 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 3-4 years as manufacturers have been passing on higher commodity prices and have had to comply with more stringent regulations on safety and emissions, it said.

The situation is similar on the export front. The share of PV exports is estimated to have slowed to 14 per cent this fiscal compared with around 17 per cent in fiscal 2019.

This was mainly due to inflationary headwinds and limited availability of foreign exchange in key export markets Latin America, Southeast Asia and Africa in the past two years, the rating agency said.

This trend is expected to continue next fiscal, it added.

But 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 around 200 basis points to around 11 per cent this fiscal, Crisil said.

A further improvement in sales mix in favour of SUVs can take that number to 11.5 per cent-12.5 per cent next fiscal, it said.

"Capacity utilisation is expected to peak at around 85 per cent this fiscal, and given that strong demand for SUVs is continuing, PV makers are incurring around Rs 44,000 crore capex in fiscals 2024 and 2025 - almost double compared with the past two fiscals," said Naren Kartic K Associate Director, CRISIL Ratings.

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, he added.

Healthy volume growth of the SUV segment, which enjoys higher margins, will steer an improvement in operating margin to 11.5 per cent-12.5 per cent next fiscal, Crisil said.

Better cash generation, along with a 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, it said.

A CRISIL Ratings analysis of six PV makers, accounting for over 80 per cent of the market, indicates as much, as per the rating agency.