September 2011

Domestic car sales growth to reach close to a decadal low

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Domestic car sales growth to reach close to a decadal low

CRISIL Research expects growth in passenger vehicles to decelerate sharply to 2-4 per cent with domestic cars growing at a mere 0-3 per cent as against our earlier forecast of a growth of 8-10 per cent. We have revised our forecasts downwards on account of a rise of Rs. 3 in the petrol prices and a 25 bps increase in interest rates. Growth is expected to reach to the levels comparable to 2008-09, when the domestic car sales grew by only 1.4 per cent due to global recession. This would be only the second time in the decade when industry will grow at sub 5 per cent. OEMs and dealers interactions indicate a situation of higher inventory and discounts for most models and high waiting periods for diesel models arising out of capacity constraints for the same.

Frequent fuel price and interest rate hikes to impact growth in 2011-12
Date Domestic cars and UVs sales growth estimates for 2011-12 May-11 Jul-11 14-16 per cent 8-10 per cent Petrol price hike of Rs. 5 on May 15, 2011 Diesel price hike of Rs. 3 on June 25, 2011 and 50 bps rise in interest rates on July 26, 2011 Sep-11 2-4 per cent Petrol price hike of Rs. 3.14 on September 15, 2011 and 25 bps rise in interest rates on September 16,2011 Source: CRISIL Research Key Events during the period

Rising cost of ownership and strikes to subdue growth in the festive season
A petrol price hike of Rs. 3.14 announced on September 15, 2011 followed by a rate hike of 25 bps points by the RBI on the subsequent day, has led us to revise our demand downwards from 8-10 per cent to 0-3 per cent in passenger cars. However, we continue to maintain a growth rate of 12-14 per cent for utility vehicles. The recent events (increase in petrol prices and yet another rate hike of 25 bps by the RBI coming) at the start of the festive season will impact the consumer sentiment negatively causing the industry to grow at a much lower rate than previously anticipated. This, in addition to labour problems at market leader Maruti's Manesar plant will further dent demand.

Cost of ownership to increase significantly, with fuel cost increasing by 30-35 per cent
Figures in Rs. '000 139 125 113 12-14% 141

10-12%

10-12%

2009-10

2010-11

2011-12F

2011-12F

Jul, 2011
F: Forecast Source: CRISIL Research

Sept, 2011

Cost of owning a car has increased significantly by 12-14 per cent due to frequent increases in fuel price and interest rate. Since its de regulation in June 2010, petrol prices have increased by 37 per cent. In this fiscal alone, the prices have increased by 13 per cent from Rs. 63 at the start of the fiscal to around Rs. 71 currently (Mumbai prices). Hence, fuel cost for driving a typical compact car has increased significantly by 30-35 per cent in 2010-11.

Prospective buyers have to contend with increasing EMIs as well. The Reserve Bank of India raised interest rates four times within the first 5 months of 2011-12. The recent hike of 25 basis points (bps) in the benchmark rates has taken the total increase to 125 bps since the start of this fiscal. While automobile financiers have not fully passed on the increased rates to end users, uncertainty regarding their decision to pass on the rate hikes coupled with the burden of EMIs (equated monthly installments) of other loans would impact demand for cars.

Demand drifts towards diesel, limited capacity for diesel engines to limit growth
Diesel prices too increased by 9 per cent during the year but difference in the prices of two fuels will continue to remain huge (43 per cent). Hence, demand for diesel cars increased significantly, far outstripping the available diesel engine capacities at the OEMs. While investments were made in expansion of diesel engine capacities during the year, most of the new capacities are likely to get commissioned only in 2012-13 limiting domestic sales growth in the current year. OEMs (original equipment manufacturers) have refrained from rapidly ramping up diesel engine capacities owing to uncertainty of government policy with regards to pricing of diesel and higher taxation on diesel cars. Maruti Suzuki's labour issues at its Manesar plant has resulted in the disruption of production, adding to the woes of the industry already reeling under the impact of a slowdown in demand. This is because the company accounts for nearly 45 per cent share of the total cars and UVs industry. The company manufacturers compact cars, Swift and A-Star, and sedans, Swift Dzire and SX4, at the plant. Production of Swift Dzire was shifted to the company's Gurgaon plant. However, production of Swift, which was re-launched in August 2011, has been severely affected. Maruti is currently expanding its capacity at Manesar plant from 0.25 million to

0.75 million by 2012-13. After the new capacities get commissioned in 2012-13, the plant's share in total installed capacity will double from 20 per cent currently. Timely resolution of these labour problems is critical to the industry growth. Should production at Maruti remain constrained due to strikes for a prolonged period, industry growth will be severely impacted.

Dealers and OEMs view festive season with caution

Our interactions with dealers and OEMs indicate lesser enquiries and footfalls as compared to that of the festive season each year.

Inventory: Inventory levels on petrol models are high owing to a major shift in demand towards diesel vehicles. On an average, inventory at dealers end for petrol models is as high as 25-30 days against an inventory of 1520 days a year ago

Discounts: Discounts have been higher than previous years especially on petrol variants of most models by around 25-30 per cent. OEMs are engaging in marketing activities like reduction in prices (for eg. Reduction in prices of Honda's City and Jazz) and special lower pricing for certain models (for instance Hyundai's i10) in order to boost their sagging sales

Waiting period: Waiting periods for petrol models have declined significantly. On the other hand, waiting periods for diesel variants are as high as 5-8 months. For instance, in case of Hyundai's Verna and Maruti Suzuki's Swift, waiting periods are as high as 8-10 months.

Our interactions with OEMs indicate that demand for petrol vehicles will keep lagging the demand for diesel vehicles throughout the year. In addition to this, launch of new models like Hyundai's Eon and Honda's Brio will prevent growth from slipping into negative territory.

Cars sales growth to reach 2008-09 levels

35% 30% 25% 20% 15% 10% 5% 0% -5%

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Source: CRISIL Research

2011-12F

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