India Autos Report Q1 2014 - New Study Released

According to the Society of Indian Automobile Manufacturers (SIAM), auto sales in September 2013 fell 9.8% year-on-year (y-o-y), to 267,711 units. Although the sharp declines in passenger vehicle sales (includes passenger car, utility vehicle and van sales), which we saw in early 2013, have been staunched in Q313 due to base effects, we highlight that the sector still faces challenges for the rest of 2013. We forecast total vehicle sales to decline 4.6% in FY2013/14 (April-March), to 3.3mn units.

Passenger Vehicle Sales Will Continue Struggling

Adding to the auto sector's woes is the Reserve Bank of India's decision to hike its benchmark repo rate by 25 basis points on September 20 (see 'Rajan Surprises With A Hike, Rupee At Resistance', September 20) and the recent price increases by many of the local automakers to maintain their profit margins (see 'Eroding Margins Mean Catch 22 For Automakers', September 3). With higher financing costs and more expensive cars on offer, consumers are unlikely to boost their purchases during the festive season. However, we are maintaining our FY2013/14 passenger vehicle sales growth forecast of -3.0%, to 2.6mn units, as the segment has the potential to experience a pick up in the final quarter of FY2013/14.

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CV Sales Remain The Weakest Link

The commercial vehicle (CV) segment, with its rapidly deteriorating fundamentals, remains the weakest link in the Indian auto sector. After suffering a precipitous 23.1% y-o-y drop in August 2013, sales contracted further in September 2013, down some 27.0% y-o-y, to 51,680 units.

The high debt levels of infrastructure firms have pushed corporates in that sector into deleveraging mode. As infrastructure companies sell assets to pare down debt, it is only logical that their defensive stance will translate into a significant decline in demand for CVs. Therefore, headwinds in the CV segment are unlikely to abate anytime soon and with H1FY2013/14 CV sales down 15.3% y-o-y, we have downgrading our already bearish full-year CV sales growth forecast further, from -4.0% to -10.0%. Concurrently, we have downgraded our FY2013/14 CV production growth forecast from -2.0% to -9.0%.

Rural Consumers Will Continue To Drive Two Wheeler Sales

We remain bullish on the two wheeler segment, which remains resilient amid a generally moribund auto sector. Domestic sales in the motorbike segment, the largest two-wheeler segment, grew a staggering 17.4% y-o-y in September 2013, to 885,117 units. Overall two-wheeler sales (which include motorbikes, scooters, scooterettes and mopeds) grew 18.4% y-o-y in September, to 1,265,704 units, bringing growth in the segment for the April-September 2013 period to 3.5% y-o-y.

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