Rising challenges may slow PV momentum


The passenger vehicle (PV) industry closed the curtains on 2022 on a high note. For instance, in December, key listed auto makers such as Tata Motors Ltd and Mahindra & Mahindra Ltd (M&M) saw their domestic PV wholesale volumes surpass the December 2019 (pre-covid) levels. Companies in the unlisted space, such as Hyundai India, also did well.

But an exception was Maruti Suzuki India Ltd. In December, its domestic PV volume was lower than 2019 and on a year-on-year (y-o-y) basis. Maintenance shutdown and chip shortage impacted production. Besides, Maruti intended to keep low stock levels as it was the last month of the year.

Hit and miss

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Hit and miss

Nonetheless, the industry’s issue of semiconductor availability is easing, albeit gradually. Also, the sentiment was largely upbeat for the industry in CY22 led by new launches and robust demand evident from strong order books. 2022 saw an increasing traction for sport utility vehicles (SUV) implying K-shaped recovery in the segment. This K-shaped economic recovery is expected to continue in CY23. However, the gap in growth between the premium and lower end segments may narrow as the pent-up demand exhausts, said Kumar Rakesh, an automobile and technology analyst at BNP Paribas Securities India.

Also, after a solid year, the overall PV sales momentum is expected to moderate in FY24. While analysts expect volumes to rise y-o-y, replicating the performance of FY23 would be quite challenging. Analysts at Nomura Financial Advisory and Securities (India) estimate the domestic PV segment volume to grow by 25% y-o-y in FY23. In FY24, the broking firm expects growth to moderate to 6%.

Apart from waning pent-up demand, the total cost of ownership is expected to rise. This is on the back of transformation to Bharat Stage-VI, phase 2 norms, effective April 2023. Further, mandatory fixation of six airbags in all cars from October might entail price increase. Considering all this, Nomura estimates PV cost of ownership to increase by 4% in FY24.

This could further dent demand for entry-level PVs. Note that Maruti derives a large share of its volumes from the entry level segment, the recovery of which took a backseat last year.

To counter the impact on volumes, companies will have to opt for more discounts, which would eat into their margins. But not all is lost, tailwinds in the form of softening commodity costs and better operating leverage could save margins to a certain extent.

Meanwhile, the electric vehicle (EV) segment in PVs is still at a nascent stage. The penetration level was around 1% in 2022. Even so, companies are launching new models to tap into this market. Tata Motors’ EVs are seeing increased traction and are leading the way with the largest market share. Competitor M&M is scheduled to start deliveries of its electric SUV, XUV400 this month. M&M’s EV plans, which were unveiled last year, were among the factors that boosted investor sentiments towards the stock. In CY22, the shares of M&M surged 49%, exceeding the Nifty Auto index’s 15% returns.

For investors in the Maruti stock, launches in the SUV segment such as Grand Vitara and Brezza are among the key monitorables. In CY22, the stock rose 13%. But the year has not ended on a happy note for Tata Motors’ investors despite its robust PV sales. The stock has declined by almost 20% marred by concerns surrounding UK-based subsidiary, Jaguar Land Rover Automation PLC. To conclude, apart from volume trends, the pace of margin expansion would be crucial for investors in these stocks.

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