As people get richer, one of the big purchases they eye is a car. And usually the larger, the better. So as India’s GDP growth accelerates, the Indian automotive industry is expected to help the country leap from the fifth to the third-largest economy.
Recent auto sales data also paint an encouraging picture. ICRA predicts an 8% increase in auto volumes in FY24 but expects growth to moderate to 5% in FY25
According to the Society of Indian Automobile Manufacturers (SIAM), the Indian passenger vehicle industry saw the highest-ever sales in Q2FY24, with domestic volumes of 10.7 lakh units. In comparison, the Q3FY24 volumes were at 10.1 lakh units due to a seasonally weak quarter. The overall growth in volumes for passenger vehicles in India is expected to be around 18-20% in FY24 on the back of strong order books.
Nifty Auto has outperformed the broader Nifty 50 index over the past quarter and year. Leading this surge are Tata Motors and Mahindra and Mahindra (M&M), while Maruti Suzuki (MSIL) has underperformed the benchmark index.
Nifty Auto outperforms Nifty 50 over the past quarter and year
Festive and wedding seasons drive volume growth
The recent uptick in car volumes has boosted an ailing sector, which was challenged by lower demand, semiconductor shortages, rising commodity prices, and high-interest rates in the past year. The festive season contributed to a surge in volumes in Q2FY24, while the wedding and harvesting seasons helped sales in Q3FY24, a traditionally weak quarter.
In January, wholesale volumes of the three listed car manufacturers increased by 16.3% YoY to 2,70,482 units. Maruti Suzuki led the pack at 1,66,802 units. The first half of 2024 saw a 20% growth in sales, and another 18% increase is expected for the second half.
Passenger Vehicle manufacturers record higher festive volumes
Sales growth was widespread across most regions, except for North-Eastern India and parts of Maharashtra. The SUV segment drove domestic car sales, with CNG-fitted cars also gaining traction in metropolitan areas.
However, a 10% drop in first-time buyers during the quarter has raised concerns about affordability for end consumers. In terms of order books, Mahindra & Mahindra leads with 2,26,000 orders (2,86,000 in Q2FY24), followed by MSIL (2,15,000) and Tata Motors-JLR (1,50,000).
Demand for entry-level cars has dipped in recent quarters due to sluggish demand, affecting sales of models across Maruti Suzuki, Hyundai, and Tata. For instance, top-selling entry-level cars across brands like Maruti Wagon-R, Maruti Swift, Hyundai i10 Nios, Hyundai i20, Tata Tiago and Tata Altroz saw YoY contraction in volumes by 3.2%, 6.5%, 21.6%, 13.5%, 28.2%, and 13% respectively in January 2024. Even Mahindra & Mahindra’s popular Bolero (priced below Rs 12 lakh) saw reduced demand from rural areas.
Yet, there are signs of recovery, as models like the Maruti Baleno, Maruti Celerio and Renault Kwid reported a demand uptick in January 2024. The overall commentary suggests that the weak demand for entry-level cars may persist till the first half of FY25.
Price hikes and domestic volumes offset sluggish exports
Price hikes made in 2023 have paid off for Indian car manufacturers. With a surge in demand, automakers have reduced discounts, effectively managing the absorption of these price hikes.
A significant portion of this demand has come from the premium vehicle segment, as rural participation has been limited. This has led to a better product mix and higher price realization on sales volumes. The average selling price of passenger vehicles across all brands in India increased from Rs 10.58 lakh in December 2022 to Rs 11.5 lakh in December 2023.
Tata Motors saw the highest price hikes in its domestic passenger vehicle segment. In contrast, its subsidiary, JLR, had a moderation in its selling prices. Both MSIL and M&M also reported a steady increase in their average selling prices (ASP), aligning with current market trends. However, MSIL’s Q3FY24 ASP declined on account of higher discounts and a marginal recovery in entry-level car sales.
Average selling prices of domestic passenger vehicles climb in Q3FY24
On the export front, progress has slowed as Indian manufacturers are exploring newer geographies. Maruti Suzuki, for instance, has started the export of its newly launched ‘Jimny’ to Latin America, the Middle East, and Africa. It's seeing good traction in Turkey and Brazil as well. Additionally, It is gearing up to launch a new mid-size electric vehicle (EV) in Japan and Europe. JLR has maintained resilience in China despite the region’s economic challenges. It is ramping up its exports to other major geographies like the US.
Q3FY24 sees margin improvement on better product mix, lower input costs
The EV segment is seeing an uptick in sales, helped by decreasing battery costs, which are improving margins for manufacturers. Tata Motors has responded by reducing the selling prices of some models like Nexon EV and Tiago EV by up to Rs 1.2 lakh to pass on falling battery costs. Tata Motors is also capitalizing on this trend with its new brand, ‘Tata.ev’, under which it has launched new models of Nexon and Tigor. Tata JLR is also expected to increase its margins from 6% to 8%.
Passenger vehicle manufacturers' EBITDA margins recover in Q2FY24
Margins of Indian PV manufacturers have been on the rise over the past two quarters due to higher price realization, softening commodity prices, better capacity utilization, and cost reduction measures. For instance, MSIL has achieved production efficiency, recording no production loss for the first time in eight quarters. Also, easing supply chain issues, particularly regarding semiconductors, has enhanced plant productivity. However, a moderation in volumes is expected to lead to a consolidation of margins in the shorter term.
M&M’s margins increased by only 40 bps YoY in Q3FY24, which is lower than its peers, despite increased price realization and volumes. This modest margin expansion results from a contraction in its tractor business margins (-50 bps) and one-time expenses for the Cricket World Cup sponsorship (-70 bps).
However, the passenger vehicle segment shows a positive trend, with EBIT margins improving by 160 bps YoY due to lower input costs and increased productivity.
Lower steel prices fuel margin expansion
Steel prices have been declining since early 2023, a trend that has continued into the first two months of 2024. China, which accounts for around 60% of global steel production, has ramped up its production despite the Chinese economy facing a crisis in its realty and infra sectors.
Surplus steel in international markets has entered Indian markets at lower prices, reducing domestic steel prices. Despite this trend, robust domestic consumption due to election-related infra spending, a revival in the Indian realty sector, and increased manufacturing have helped volume absorption.
Automakers, having raised costs during periods of high commodity prices, have refrained from reducing prices in response to falling steel costs, thereby widening their margins.
Steel prices show a declining trend
This trend of lower steel prices in Q4FY24 is expected to further improve auto manufacturers’ margins in H1FY25. Most of the raw materials for manufacturing are typically sourced 3-6 months in advance, and the reduced costs of palladium and rhodium are also expected to boost margins.
While the festive and wedding seasons have spurred demand for automobiles, the industry still faces challenges like subdued rural demand and high-interest rates. The decline in the sales of entry-level models signals financial stress among first-time buyers. However, the auto industry is benefitting from lower input costs and a shift towards premium models. The sector has shown clear signs of resilience and new avenues for growth, indicating a promising outlook