CRISIL Research-Report Cars Sep11

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Domestic car salesgrowth to reach closeto a decadal low

September 2011



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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

Key Events during the period

May-11 14-16 per cent Petrol price hike of Rs. 5 on May 15, 2011

Jul-11 8-10 per cent 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

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

113

125

139 141

2009-10 2010-11 2011-12F 2011-12F

Jul, 2011

10-12% 10-12%

Sept, 2011

Figures in Rs. '000

12-14%

F: Forecast


• 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 enginecapacities 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 15-

20 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

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CRISIL Research-Report Cars Sep11