SUVs to drive volume of PVs 5-7% next fiscal: Crisil
The SUV segment, known for its high margin, is expected to boost the operating margin to 11.5-12.5 per cent in the next fiscal year.
- Feb 26, 2024,
- Updated Feb 26, 2024 3:42 PM IST
The volume of passenger vehicles (PV) is projected to reach a new high for the third consecutive fiscal year, with a growth of 5-7 per cent on top of an estimated 6-8 per cent for the current fiscal year. This is largely driven by the Sport Utility Vehicles (SUV) segment, even as demand for cars and exports remains subdued, stated a Crisil report.
The SUV segment, known for its high margin, is expected to boost the operating margin to 11.5-12.5 per cent in the next fiscal year. The strong cash generation, combined with a robust balance sheet and ample liquidity, will facilitate substantial capital expenditure for additional capacity. This will negate the need for significant debt addition, thereby maintaining the credit profiles of PV manufacturers, as per a CRISIL Ratings analysis of six PV manufacturers, accounting for over 80 per cent of the market.
Says Anuj Sethi, Senior Director, CRISIL Ratings, “While the overall PV volume is seen rising 5-7 per cent next fiscal, we expect demand for SUVs to accelerate at twice the pace at over 12 per cent driven by array of feature-laden launches at competitive price points, varied technology options including hybrid and electric, and increased access to credit.”
The shift in consumer preference has significantly increased the demand for SUVs, causing its market share to double to nearly 60 per cent of the total domestic volume this fiscal, up from around 28 per cent prior to the pandemic in fiscal 2019. This trend is predicted to continue, fueled by a robust pipeline of new model launches across various price points, including electric variants, and the expected normalization of semiconductor supply after an extended period of scarcity.
However, the demand for cars is anticipated to decrease this fiscal year due to the ongoing slump in the rural market and reduced affordability at the entry level. Vehicle costs have surged in the past 3-4 years as manufacturers have passed on higher commodity prices and adhered to stricter safety and emissions regulations.
The export scenario mirrors the domestic one, with the share of PV exports projected to have declined to 14 per cent this fiscal, down from approximately 17 per cent in fiscal 2019, largely due to inflationary pressures and a shortage of foreign exchange in key export markets, including Latin America, Southeast Asia, and Africa, over the past two years. This trend is likely to persist into the next fiscal year.
The growing market share of SUVs, coupled with steady commodity prices and the full impact of last fiscal's price hikes, has led to an operating margin increase of approximately 200 basis points to around 11.0 per cent this fiscal year for manufacturers. If the sales trend leans more towards SUVs, this figure could rise to between 11.5 per cent and 12.5 per cent in the next fiscal year.
Naren Kartic.K, Associate Director, CRISIL Ratings said, “Capacity utilisation is expected to peak at ~85 per cent this fiscal, and given that strong demand for SUVs is continuing, PV makers are incurring ~Rs 44,000 crore capex in fiscals 2024 and 2025 — almost double compared with the past two fiscals. But healthy cash accrual and surplus will ensure reliance on external borrowings remaining low, keeping the credit profiles of manufacturers in the CRISIL Ratings portfolio stable.”
The expected key debt metrics of CRISIL-rated manufacturers, including debt to earnings before interest, tax, depreciation and amortisation, and interest cover, are projected to remain strong at less than 0.1 time and over 40 times, respectively, this fiscal year and the next. Factors to keep an eye on in the future include commodity price fluctuations, changes in interest rates, the impact of monsoon on rural demand, dealer inventory levels, and global macroeconomic conditions.
The volume of passenger vehicles (PV) is projected to reach a new high for the third consecutive fiscal year, with a growth of 5-7 per cent on top of an estimated 6-8 per cent for the current fiscal year. This is largely driven by the Sport Utility Vehicles (SUV) segment, even as demand for cars and exports remains subdued, stated a Crisil report.
The SUV segment, known for its high margin, is expected to boost the operating margin to 11.5-12.5 per cent in the next fiscal year. The strong cash generation, combined with a robust balance sheet and ample liquidity, will facilitate substantial capital expenditure for additional capacity. This will negate the need for significant debt addition, thereby maintaining the credit profiles of PV manufacturers, as per a CRISIL Ratings analysis of six PV manufacturers, accounting for over 80 per cent of the market.
Says Anuj Sethi, Senior Director, CRISIL Ratings, “While the overall PV volume is seen rising 5-7 per cent next fiscal, we expect demand for SUVs to accelerate at twice the pace at over 12 per cent driven by array of feature-laden launches at competitive price points, varied technology options including hybrid and electric, and increased access to credit.”
The shift in consumer preference has significantly increased the demand for SUVs, causing its market share to double to nearly 60 per cent of the total domestic volume this fiscal, up from around 28 per cent prior to the pandemic in fiscal 2019. This trend is predicted to continue, fueled by a robust pipeline of new model launches across various price points, including electric variants, and the expected normalization of semiconductor supply after an extended period of scarcity.
However, the demand for cars is anticipated to decrease this fiscal year due to the ongoing slump in the rural market and reduced affordability at the entry level. Vehicle costs have surged in the past 3-4 years as manufacturers have passed on higher commodity prices and adhered to stricter safety and emissions regulations.
The export scenario mirrors the domestic one, with the share of PV exports projected to have declined to 14 per cent this fiscal, down from approximately 17 per cent in fiscal 2019, largely due to inflationary pressures and a shortage of foreign exchange in key export markets, including Latin America, Southeast Asia, and Africa, over the past two years. This trend is likely to persist into the next fiscal year.
The growing market share of SUVs, coupled with steady commodity prices and the full impact of last fiscal's price hikes, has led to an operating margin increase of approximately 200 basis points to around 11.0 per cent this fiscal year for manufacturers. If the sales trend leans more towards SUVs, this figure could rise to between 11.5 per cent and 12.5 per cent in the next fiscal year.
Naren Kartic.K, Associate Director, CRISIL Ratings said, “Capacity utilisation is expected to peak at ~85 per cent this fiscal, and given that strong demand for SUVs is continuing, PV makers are incurring ~Rs 44,000 crore capex in fiscals 2024 and 2025 — almost double compared with the past two fiscals. But healthy cash accrual and surplus will ensure reliance on external borrowings remaining low, keeping the credit profiles of manufacturers in the CRISIL Ratings portfolio stable.”
The expected key debt metrics of CRISIL-rated manufacturers, including debt to earnings before interest, tax, depreciation and amortisation, and interest cover, are projected to remain strong at less than 0.1 time and over 40 times, respectively, this fiscal year and the next. Factors to keep an eye on in the future include commodity price fluctuations, changes in interest rates, the impact of monsoon on rural demand, dealer inventory levels, and global macroeconomic conditions.