Is the auto sector revving back to life? A 20% YoY surge in September vehicle sales suggests that India’s auto market is shifting back into high gear. Climbing from 17 million to 21 million units within a year, the sector seems to be recovering from a prolonged slump, but it's not yet back to its 2020 peak of 26 million. For investors and industry watchers alike, the real excitement lies ahead: analysts predict a 7%-9% growth rate for this fiscal year.

 While the Nifty Auto index has outperformed the broader Nifty 50 over the past quarter and year, it is the two-wheeler industry that’s truly in the spotlight. Stocks like TVS Motors and Bajaj Auto have surged by more than 40%, making them standout performers in India, the world's fourth-largest automobile market. In contrast, Eicher Motors has had a  modest run, underperforming the broader index in the past three months.
 

Nifty Auto outperforms Nifty 50 over the past quarter and year

Festive fervour expected to boost two-wheeler demand

Two-wheeler sales have had a challenging time in FY24, but festivals like Ganesh Chaturthi and Onam have given the sector a much-needed boost. The upcoming  Diwali festival is also expected to further boost sales. 

Festive demand fuels two-wheeler sales 

The festival season has resulted in almost stagnant growth volumes, compared to 2022. A stable pricing environment across all segments and improving consumer sentiment in urban markets for premium two-wheelers will likely translate into higher demand, and the low base for some of the segments will help in increasing sales for FY24.

However, delayed monsoons have played spoilsport, and hit crop yields in rural areas. The impact on farmer incomes could lower the sales of entry-level two-wheelers (with engine capacities of 125 cc and below) in these regions.

Lower international demand hampers two-wheeler exports 

The export of two-wheelers, which had been booming until a few years ago, have slowed down considerably. Exports from India reported an 18% decline, amounting to 3.65 million units from 2022-23. This downturn was influenced by a liquidity crunch, currency devaluations, and country-specific socio-political and economic weakness. The outlook for African markets in Q1FY24 is also fragile, and could negatively impact the volumes of Bajaj Auto and TVS. 

Two-wheeler exports stall amid muted demand

However, falling freight rates and better container availability are silver linings for exporters. Two-wheeler exports from India are expected to see positive growth starting from Q2FY24. There is increasing demand for Indian-made motorcycles and scooters in new geographies like Mexico, Philippines, Latin America, and Turkey. Based on current monthly volumes, the share of the Philippines in India’s two-wheeler export market could rise to 8% in FY24 from 4% in FY22.

Cut in FAME subsidy impacts electric two-wheeler sales

The reduction in the FAME subsidy has posed challenges for electric two-wheeler players in maintaining volume growth. While it's understood that governmental support through subsidies cannot be indefinite, the immediate impact on sales has been noticeable. 

EV sales decline following FAME subsidy cut

TVS Motors has, however, successfully established its electric product, iQube, in the market. In the first six months of the fiscal year, TVS Motors dispatched 96,190 iQube units, slightly below the 96,654 units in FY23, indicating a healthy customer response. The company has started exporting iQube to Nepal and plans to expand to other markets in FY24.

Big players expand market share in EV space, try to keep startups at bay

The established auto players are using their financial strength and ability to absorb short-term losses to fend off the new, younger competitors and gain a larger share of the electric vehicle market. Investments in expanding their dealer networks and building EV infrastructure are key to attracting more EV customers. Currently, EVs account for 3-4% of total sales volume. 

Large EV players expand market share post-FAME subsidy cut

To strengthen their presence in the electric mobility sector, these companies are partnering with e-retailers in India for last-mile delivery solutions. However, the costs of launching new products, heightened competition, and R&D investments could put pressure on margin expansion in the near term.

Lower steel prices offer margin expansion opportunities 

Rising commodity prices and a constrained supply of semiconductors have pressured automakers into raising their product prices. China's manufacturing slowdown has led to supply chain disruptions, from semiconductors to steel production, increasing raw material costs globally. However, the Chinese economy has not rebounded as expected, leading to lower steel prices over the past six months. In Q2FY24, steel prices reached their lowest point of the year, a trend that will likely benefit manufacturers with a delayed effect.

Steel prices show a declining trend

Improvements in the supply of various automotive chips have also contributed to cost reductions. Two-wheeler manufacturers, in particular, are expected to see lower input prices in H2FY24, which, when combined with higher price realisation, could expand margins.

While the auto industry navigates a range of challenges from supply chain disruptions to changing consumer demand, there are clear signs of resilience and avenues for growth. The sector’s adaptability to evolving market dynamics indicates a promising outlook