Commercial (CV) and passenger (PV) vehicles will continue to drive recovery in India’s automotive sector volume this fiscal, while two-wheelers and tractors are expected to underperform once again.

CV and PV volume could grow 18% and 12%, respectively, this fiscal after rising 26% and 13%, respectively, last fiscal. Two-wheelers will see a modest sales growth of 6% after a 10% cut last fiscal, while tractor volume growth is expected to be flat or in the low single digit compared with a 6% decline.

Says Pushan Sharma, Director, CRISIL Research, “CV demand growth, particularly for medium and heavy commercial vehicles (MHCVs), is expected to be backed by replacement demand because of improved utilisation and profitability of fleet operators, and government spending on infrastructure. Light CVs will be propelled by a surge in e-commerce and better last-mile connectivity, while demand for buses will be driven by the gradual reopening of schools and offices, and easing of mobility restrictions. That said, overall CV demand, despite double-digit growth last fiscal, and likely this fiscal, will still be 16% below fiscal 2019 level.”

PV volume, meanwhile, will be driven by easing of chip shortages, particularly in the second half, as capacity additions by chip manufacturers come onstream, helping clear the sizeable order backlog built over the past six months. Besides, inventory build-up from the current low of 15-20 days to the normative levels of 30-35 days will account for about a third of the incremental volume.

Two-wheelers sales, on the other hand, is expected to register a modest recovery after declining for three successive fiscals, driven by the opening up of educational institutes and improved mobility. However, like last fiscal, a sharp increase in the total cost of ownership and petrol prices will weigh on demand. Consequently, volume would be massive ~28% lower than in fiscal 2019.

The tractor segment will be bogged down by high-base effect. While volume had declined last fiscal, it was still on the back of an all-time high of fiscal 2021, when purchases had surged following reverse migration of labour following the pandemic, and farmers redirecting savings from fewer social events. Volume this fiscal will likely be supported by healthy farm income, driven by higher crop prices. It presumes a normal southwest monsoon, as predicted by the Indian Metrological Department.

Says Naveen Vaidyanathan, Director, CRISIL Ratings, “We expect higher volume and easing commodity prices in the second half to ease the pressure on profitability of original equipment manufacturers (OEMs) this fiscal¹. With variable cost accounting for about 85% of overall cost, the sharp surge in commodity prices, especially steel, combined with modest volume growth, has led to OEMs absorbing a significant part of the cost inflation. Operating margins — likely to improve to 9-10% this fiscal from an expected record low of ~8% last fiscal, will remain well below the 12.5% average during fiscals 2017-21.”

Strong balance sheets and modest debt have helped OEMs buttress the impact of profitability pressures and sustain their credit profiles in the recent past. Higher accrual driven by better revenue and a slight improvement in operating profitability will support higher capital expenditure by OEMs, including for enhancing electrification, and will keep credit profiles ‘Stable’ over the medium term.

Any resurgence in Covid-19 cases, continuing semi-conductor shortages, and the progress of monsoon will bear watching in the road ahead.

¹ This is based on an analysis of 14 OEMs rated by CRISIL Ratings which account for over 60% of the sector’s capacity