Auto sector poised for double-digit growth in FY23 after 3 years

While commercial vehicles are expected to benefit from strong replacement demand, the two-wheeler and tractor segments are expected to gain from a recovery in the rural economy.

After negotiating some tight corners over the last three years, India’s automotive market is poised for single to double-digit growth across segments -- from commercial vehicles (CVs) and tractors, to passenger vehicles and two-wheelers -- as demand and supply-side problems even out.

While CVs are expected to benefit from strong replacement demand, the two-wheeler and tractor segments are expected to gain from a recovery in the rural economy.

PV sales, which have remained range bound because of the semiconductor shortage despite robust demand, too, are expected to advance at a fast clip and will be the first to return to the peak volume levels of financial year 2018-19 (FY19) as automakers start sourcing chips from multiple vendors, said Binay Singh, India autos and shared mobility analyst, Morgan Stanley. It will be followed by CVs and two-wheelers, he added.

Continuing the recent trend, SUVs (sport utility vehicles) will lead the momentum, said Shashank Srivastava, executive director, Maruti Suzuki India. In the last couple of years, the share of SUVs and MPVs has risen in the PV segment. There has been a decline of entry-level hatchbacks and sedans. In fact, SUV was the largest segment for the first time last year, he said.

“This trend is expected this year as well and subject to no supply-side constraints the overall PV market may exceed the previous best of FY19. However, segment-wise the market structure will change with greater share of SUVs and MPVs,” Srivastava told Business Standard. The share of SUVs and MPVs in the overall PV market is expected to jump to 1.6 million units in FY23 from 976,000 units in FY19. Similarly, the share of passenger cars is estimated to decline to 141,000 units from 217,000 units over the same period, he said.

“Replacement will be the key driver in FY23 across all segments of the auto market, be it passenger vehicles, two-wheelers or commercial vehicles,” said Singh. For instance, PVs, which have seen strong underlying demand for several quarters, are expected to surpass the FY19 peak of 3.3 million units and reach around 3.7 million units as semiconductor availability improves, he said.

Semiconductor inventory at some of the global tier-I OEMs (original equipment manufacturers) has now increased to one or two months, said Singh. This will gradually trickle down across the industry and improve supplies by the second half of FY23.

Car market leader Maruti Suzuki India’s management said during the post-earnings investor call that they expect the PV market to end FY23 with sales of 3.4-3.5 million units. This despite the company expecting chip availability to remain a challenge.

Others, too, are optimistic on PVs. According to a recent note by brokerage Motilal Oswal, PV volumes are likely to recover from the low base of FY21, driven by higher aspirations, improving affordability, and lower penetration. It expects the PV industry to clock a compound annual growth rate (CAGR) of 15 per cent in terms of volumes over FY22-24.

There were some indications of this bounce in May as auto sales increased fourfold year-on-year (YoY) to 1,532,809 units, according to the Society of Indian Automobile Manufacturers (Siam). Dispatches, however, were still lower than the May 2019 numbers, when the industry sold 2,004,137 units. In fact, for segments like two-wheelers and three-wheelers there is enough room to improve with volumes being at nine-year and 14-year lows, respectively, the industry body had said.

Morgan Stanley’s Singh believes that two-wheeler sales will see significant recovery of 16 per cent YoY growth in FY23 and 13 per cent in FY24 after a prolonged slowdown. Motorcycle and scooter sales in India stood at 13.4 million units in FY22, similar to the FY12 numbers.

Given the strong fundamentals and the start of an up-cycle, Singh’s stance on the overall auto sector in India is “overweight”. Within that, the preference is more for four-wheelers.

“We actually have a lot of new electric vehicle players that have come up in the two-wheeler segment. So, to that extent, the pie will get divided as you go ahead, whereas in the four-wheeler space we largely see existing companies leading on electrification. So, to that extent, the pie remains largely between these companies. In summary, we prefer four-wheelers over two-wheelers to play the up-cycle,” said Singh.