Automotive Industry Steers Forward In Low Gear
Special Feature on Automotive Industry
Just as it was bouncing back after the easing of lockdowns following the pandemic, the automotive industry has once again been hit hard on account of the second wave which has slowed down both production and demand. So, what does the future hold for this stricken industry? Are there any triggers to quicken the pace?
The automobile industry in India is the world’s fifth-largest. Given that, the automotive and allied companies have pulled up their socks to increase their production and the sector foresees accounting for 65 million new jobs in India. The automotive industry also benefits from global supply chain rebalancing, government incentives to increase exports and technology disruptions. These developments will contribute in creating opportunities at all levels of the automotive value chain. The Indian automotive industry, including component manufacturing, is expected to reach Rs 16.16-18.18 trillion (USD 251.4-282.8 billion) by 2026.
Data released by the Department for Promotion of Industry and Internal Trade (DPIIT) indicates that the industry attracted foreign direct investment (FDI) worth USD 25.40 billion between April 2000 and December 2020, accounting for 5 per cent of the total FDI during the period. The Government of India has been keen on boosting foreign investment in the automobile sector and has given a nod for 100 per cent FDI under the automatic route. In the recent Union Budget 2021-22, the government announced the launch of voluntary vehicle scrappage policy, which is likely to push up the demand for new vehicles through the removal of old and unfit vehicles.
The increasing middle-class and young population triggers growth in volume for the two-wheeler segment. Moreover, the growing interest of the companies in exploring the rural markets has further aided the growth of the sector.
Additionally, the Union Cabinet has outlaid Rs 57,042 crore (USD 7.81 billion) for automobiles and the automotive components’ sector through the production-linked incentive (PLI) scheme under the Department of Heavy Industries. However, since March 2020, the Indian automotive industry has been under pressure due to a series of unprecedented problems which have been responsible for shrinking production, productivity and sales. Uncertainty has been hovering over the automotive industry due to the transition to BS-VI norms, the corona virus pandemic, nationwide lockdowns, supply chain constraints and labour migration.
Revival and Slump
The year commenced with zero production and negligible sales but the sector managed to bounce back faster than expected with sequential growth in month-on-month sales. The revival can largely be attributed to pent-up demand, preference for personal mobility during the pandemic, easing of supply chains, labour availability, new launches, pushing up of stocks at dealerships and the high expectations from the festive season towards the end of the year. Unfortunately, the second wave of the pandemic put a spanner in the works and the automotive industry has had to slacken its pace once more.
Industry Performance
As per the latest data released by the Society of Indian Automobile Manufacturers (SIAM), in the financial year FY20-21 there was de-growth in sales of all segments compared to the previous years as seen from the following figures: (-) 2.24 per cent for passenger vehicles with sales of 27.11 lakh units; (-) 13.19 per cent for two-wheelers with sales of 151.19 lakh units; (-) 20.77 per cent for commercial vehicles with sales of 5.69 lakh units; and (-) 66.06 per cent for three-wheelers with sales of 2.16 lakh units. If we consider the Q4FY21 sales, which might include some deferred sales from the previous quarters, only sales in the passenger vehicle segment were marginally above the previous high as compared to sales of commercial vehicles, two-wheelers and three-wheelers.
Even though the automobile demand is predicted to benefit due to the enhanced pace in economic growth, the pent-up demand has shown declining numbers in the current unlocking phase as compared to last year. Higher fuel prices showing a 40 per cent rise on a YoY basis and price hikes by original equipment manufacturers (OEMs) are pointed out as the reasons for the declining pent-up demand. Looking at the trend, the demand for two-wheelers has been unenthusiastic whereas the demand for passenger vehicles has been buoyant owing to the relatively better income profiles of car customers.
Meanwhile, limited space is being sensed for electric power steering (EPS) upgrades due to the rising growth expectations and margin costs resulting from firm commodity prices. The OEMs are raising prices to partially offset the firm commodity prices. The current quarter i.e. Q1FY22 has had an impact on profitability due to the sudden outburst of the second wave in April and May that has led to temporary production shutdowns. The Nifty Auto index has performed in line with the broader market in Q1FY22, posting 7 per cent growth on QoQ basis, attributed to commodity cost inflation and moderating growth trends across two-wheelers.
levels over the past six months due to inflationary cost pressures and elevated valuations. An analysis of FY21 results of 10 listed automobile companies forming part of the top 1,000 companies listed by market capitalisation shows that there was a decline in net sales of 7.91 per cent among the companies under our coverage. There was on an average 0.08 per cent decline in PBIDT except other income with Tata Motors, Force Motors and SML Isuzu posting losses in the last fiscal year. On the other hand, companies like Mahindra and Mahindra and Escorts outperformed the rest of the group, recording growth in operating profitability of 66.65 per cent and 69.36 per cent, respectively.
Taking into account data regarding the performance of automotive companies in the equity markets, we have taken into consideration the returns given by automotive companies on YTD basis and in the last one year. On YTD basis, Tide Water Oil Company (India) posted the highest returns of 279.8 per cent followed by RACL Geartech yielding returns of 229.12 per cent. The heaviest returns were posted by High Energy Batteries (India), amounting to 745.84 per cent followed again by RACL Geartech bagging returns of 560.96 per cent. Tide Water Oil Company has been one of the leading players in the Indian lubricant industry since 1928. It manufactures and markets Veedol brand of lubricants.
Electric Vehicle Market
Within the automotive industry, the electric transport segment has been in favour. Global investments in electric transport improved 28 per cent in 2020 year-on-year to USD 139 billion. Manufacturers have lined up about 500 electric vehicle (EV) models to be rolled out by 2022, reveals Bloomberg New Energy Finance (BNEF) Electric Vehicle Outlook report. The EV market is predicted to reach Rs 50,000 crore (USD 7.09 billion) opportunity in India by 2025. Several technology and automotive companies have expressed their willingness to contribute and make investments in India’s EV space. Automobile companies such as Hyundai, MG Motors, Mercedes and Tata Motors have launched EVs in the market. A study conducted by Castrol has revealed that a majority of Indian consumers would be inclined to buying an electric vehicle by the year 2022.
Besides, the study also highlights the fact that for an average Indian consumer, the price point of Rs 23 lakhs along with a charging time of 35 minutes and a range of 401 kilometres from a single charge will be the key points to get mainstream EV adoption. A cumulative investment of approximately Rs 12.5 trillion (USD180 billion) in vehicle production and charging infrastructure would be required until 2030 to meet India’s EV ambitions. A report by India Energy Storage Alliance estimates that the EV market in India is likely to increase at a CAGR of 36 per cent until 2026. Also, projection for the EV battery market is augured to expand at a CAGR of 30 per cent during the same period.
Industry Outlook
Two-wheelers and passenger vehicles have a command over the domestic Indian automobile market. Small and mid-sized cars dominate passenger car sales. The increasing middle-class and young population triggers growth in volume for the two-wheeler segment. Moreover, the growing interest of the companies in exploring the rural markets has further aided the growth of the sector. India is also a prominent automobile exporter and has strong export growth expectations for the near future.
In addition, several initiatives by the Government of India and major automobile players in the Indian market are expected to make India a leader in the two-wheeler and four-wheeler markets across the world. Meanwhile, relaxation in lockdown norms globally will improve exports further. In terms of demand, retail sales have been impacted whereas demand in the PV segment is expected to revive faster post lockdown relaxations owing to the below normal inventory levels coupled with high waiting period in fast-selling models. Demand in the two-wheeler segment is predicted to remain low-spirited with high dealer inventory. The recovery of the commercial vehicle cycle may sustain and gain momentum post the pandemic and gradual reopening of the economy. Slowdown in tractor demand has been witnessed in rural areas due to movement restrictions. The bus and three-wheeler segments will remain under pressure due to the closure of schools, colleges, offices and limited use of public transport.