Automobile industry at a glance

7.1% Share in India’s GDP

35 million employment generation
40% Share in global R&D
4.3% share in India’s exports

Indian automobile market is expected to become the world’s third largest in terms of volume by
2026. At present, the automobile industry churns out 26 million vehicles (includes passenger
vehicles, commercial vehicles, three wheelers, two wheelers, quadricycles etc.) Domestic market
accounts for 81% two wheeler sales and 13% passenger vehicles, whereas passenger car sales are
dominated by small and mid sized cars.The key growth drivers of the automobile industry have been
rising income and credit availability and financing options. Increase in activity in the infrastructure
sector has contributed to demand of commercial vehicles. Indian automobile manufacturers save
around 10-25% on operations as compared to Europe and Latin America. This has been the reason of
large FDI inflows worth US$24.2 billion between April 2000 and March 2020.

Currently valued at 8.7 trillion (USD 118 billion), the Indian automobile sector is expected to reach
18 trillion (USD 282 billion) by 2026. Make in India and Automotive mission plan 2026 are some of
the initiatives targeted towards boosting revenue in this sector.

The focus is also shifting gradually towards electric cars. The second phase of Faster Adoption and
Manufacturing of (Hybrid) and Electric Vehicles (FAME-II) is underway.

Domestic market share by segment 2019-20

Passenger vehicles Commercial vehicles
Three wheelers Two wheelers

13%

3%
3%

81%

While the automobile industry comprises of a wide number of segments, the focus is majorly done
on car and utility vehicles and commercial vehicles.
In FY2020, domestic demand declined by 18% y-o-y owing to the following factors – price hikes due
to regulatory requirements, road tax hike in some states, lower loan to value ratio due to liquidity
constraints, rise in fuel prices, higher interest rates in FY2019. In March 2020, the lockdown resulted
in 50-53% decline on year in volumes and sales were negligible in April. The supply chain was hit
hard due to COVID-19 in fiscal 2021 that ultimately led to the shutdown of all OEM plants. Due to
this, there was a decline in the figures in Q1FY21 however the production has shown signs of
recovery. Because of the low volumes and volatile raw material prices, margins are expected to be
impacted in the FY2021. The global demand for automobiles have declined significantly and this will
result in lower export numbers.
1) Small cars comprises of micro, mini and compact segments (length less than 4000 mm) 2) Large
cars comprises of super compact, mid-sized, executive, premium and luxury segments (length more
than 4000 mm)

Source: Society of Indian Automobile Manufacturers (SIAM), CRISIL Research

Social distancing has contributed to towards higher share of first time buyers who are looking to
avoid public transport. Replacement buyers’ share declined due to postponement of their decision
due to unstable income and job loss. Share of salaried buyers have spiked. Maruti Suzuki’s decision
to discontinue diesel models and other OEM’s also following the move has resulted in rise of petrol
variants.

Source: Society of Indian Automobile Manufacturers (SIAM), CRISIL Research

Utility vehicles outperformed small cars as new models were launched and there was a lower
average price hike of BS VI models. In H1FY21, Kia and MG motors gained 17% volume share in the
UV segment. 11 models were launched in FY20 (37% share in H1FY21) and 4 models launched in
FY21 (3% share in H1FY21). UVs were also offered in diesel variants and the average price hike of the
top 5 models due to BS VI regulations was only 2%. No new manufacturer entered the smaller cars
segment and only 4 new models were launched in FY20 which contributed only 12% in the H1FY21.
Diesel variants were not available for buyers and the average price hike of top 5 models was 3% due
to BS VI regulations. However rural buyer’s share for smaller cars was 50-55% whereas for the UVs it
was 22-27%

Source: CRISIL Research

The new models launched in fiscal 2019 has a share of only 3% in the domestic sales in 2019.
However in 2020, these models contributed 16% to the market share. Some of the launches that
were planned in 2020 have been deferred to 2021, the small car segments like S-Presso, Altroz and
Aura are expected to show a momentum in FY2021.

In the passenger vehicles segment, small cars have the major share in domestic volumes. Share of
compact UVs has increased with the launch of new models – Venue, Seltos, XL6, Triber and XUV 300.
Due to higher total cost of acquisition and correction in inventory of the small cars segment, sales
volume declined 22% on year in FY2020. In FY2021, this is forecasted to decline 8-10%. Sales are
expected to recover 12-17% on year in FY2022.

Large car volumes is expected to show continued fall in fiscal 2021 and 2022. Honda Civic launched
in 2019 contributed 1% to yearly sales in FY2020 but the volumes declined by 43% on year. The
demand is expected to further drop by 22-27% in FY2021 and 2-7% in FY2022. This drop can be
attributed to the entry of compact UVs in 10-12 lakhs range that are feature rich and priced
competitively.

Cars and UVs are expected to become costlier by 2-4% in FY2021. This is due to the cost of becoming
BS VI compliant. However, these expected costs are lower than what was predicted (4-6%) due to
weak demand. Diesel cars have seen a greater price hike as the costs of upgradation is more for
diesel vehicles compared to petrol vehicles. Therefore, UVs, which are mainly offered in diesel
variants are expected to become more costlier.

Passenger vehicle sales a healthy pace post FY2021 due to fast paced development in infrastructure,
stable ownership costs, lower cost of acquisition and lower crude oil prices. Domestic sales are
expected to increase at a CAGR of 6-8% between 2020-25.

India is also trying to enter the electric vehicle segment but the charging infrastructure is weak.
National Electric Mobility Mission Plan 2020 was launched to develop the infrastructure over the
next five years. The government has allocated Rs 10,000 crore for the second phase of Faster
Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) that will provide a subsidy of Rs
10,000 per KWh to 4 wheelers (BEV, PHEV, strong hybrid) for commercial purpose and public
transport.

Regional push for adoption of EVs is also on the rise. Government of Delhi has announced subsidies
of up to Rs 1.5 lakh for first 1,000 electric cars. This benefit would be seperate to FAME-2 policy
benefits. The Telangana government announced 100% exemption of road tax and registration fee on
purchase of first 5,000 electric cars. The government of Tamil Nadu offered 100% exemption for
battery-operated vehicles. A 40 gigawatts battery manufacturing plant is also in the works.

The exports declined significantly due to decline in the global demand. Mexico accounted for 24% of
total exports FY2019 showed a 4% decline in FY2020. However exports were on the rise in Africa and
the Middle East due to newly launched models like the Hyundai Venue, Maruti S-Presso, Renault
Triber and Kia Seltos. Exports are expected to decline 30-34% on year before recovering in FY2022.
Industry operating margins will decline from 8-9% in FY2020 to 7.4-7.9% in FY2021 due to input costs
of upgradation to BS VI norms, even though basic raw material index showed a decline of 8-10% on
year. Manufacturers also offered higher discounts to clear off their BS IV inventory in FY2020. This
led to 300-350 bps dip in the industry margin for FY2020. In FY2021, OEMs didn’t offer significant
discounts during the festive season and the pent up demand made for the gap. Margins are
expecred to further decline in FY2021 by 60-100 bps but expected to recover by 150-190 bps in
FY2022.
Due to weak demand, ROCE for FY2020 is expecred to decline. Rising capex to develop new
products, expansion for capacity, compliance and safety regulations, investments for electric vehicle
infrastructure development will further deteriorate ROCE in FY2021. Decline in demand is further
going to worsen it and it is only expected to improve in FY2022 as demand revives.