The Indian automotive industry has had a moderately positive beginning to the financial year, led by consumer sentiments and seasonal festivities. Q1FY25 domestic listed companies’ total sales of passenger vehicles grew by an average of 8.2% YoY, aligning closely with our estimate. Notably, the demand for UV continues to be promising even after a high base. Whereas entry segment cars struggle to gain traction, which was partially offset by higher exports.
We also noted that extending the bank repayment cycle from 60 to 90 days has prompted OEMs to stock more inventory, as they now have an additional month to manage it. Inventory is increasing and could impact dealers’ profitability due to a longer borrowing cycle and increase in operational cost.
In June, retail sales of passenger vehicles declined by 6.7% YoY. The small car segment is a major concern and requires immediate revival. Scorching heatwave in the northern part of India also affected demand.
In Q1, CV dispatches grew in the mid-single digits owing to election year and lower business activity in tipper sales, with much of the growth driven by the M&HCV high tonnage vehicle and bus categories. Encouragingly, the new government’s commitment to ongoing infrastructure development remains on track, signalling long-term growth prospects for the segment.
The growth in electric two-wheeler (E2W) sales remained subdued in Q1 FY25, with a year-over-year increase of only 1.62%, despite the affordable variants offered by leading manufacturers. The industry attributed this slowdown to the reduction in government subsidies for electric vehicles, following the replacement of the FAME 2 policy with the Election Mobility Promotion Scheme 2024. The moderation in electric passenger vehicle sales can also be linked to pre-buying activity in March 2024. The reduction in subsidies is expected to slow the pace of the transition towards electrification in the near term.
Despite challenges, the industry has ability to maintain moderate growth at high base, generating significant volume and meet both domestic and export demands. Although overall production and sales have shown resilience, the growth pace remains cautious, reflecting the complex interplay of market dynamics (shifting to new powertrains) and economic factors affecting consumer behaviour. Industry experts predict a favourable outlook across segments, with two-wheelers expected to lead. Projections for FY25 suggest a growth rate of 11% for two-wheelers, 5% for both passenger vehicles and commercial vehicles, and 4% for tractors compared to 10%/7%/-1%/-1.2% in FY24,
Hence, the sector will look forward to the budget speech to determine the next fresh triggers. As part of the government’s green and clean mobility strategy highlighted in the interim budget, the industry also demands the government carry forward the incentives for EVs and hybrids through the introduction of FAME III until the target of EVs constituting 30% of all vehicle sales in India. Promoting exports of EVs through the PLI scheme and other measures. Incentives for wider adoption of flexi fuel technology by blending ethanol into petrol. Reinstating with an extension of Income tax deduction on interest paid on electric vehicle purchase, which was expired in March 2023, from Rs1.5lakh to 2 lakh annually. Further, increase in rural spending and capital expenditure to boost rural & urban demand.
We anticipate that above-average monsoon rainfall, policy stability post-election, and government initiatives promoting manufacturing and infrastructure will bolster overall economic growth, thereby supporting the auto sector’s upward trajectory. The expansion plans and long-term outlook for major OEMs remain robust, with multiple launches across various powertrains.
However, overall, we maintain a neutral rating for the sector due to diminishing pent up demand and a high base. Investors are advised to be selective and consider a buy-on-dips or accumulate strategy. Despite ongoing efforts to expand capacity and streamline operations, we expect growth to continue, albeit at a moderated pace compared to previous years. On a 1 yr. fwd. basis the industry is trading at 22x which is marginally below its long- term avg. at 23x. factoring ~16% avg. earning CAGR over FY24-26E, compared to avg. earning growth of ~38% in FY24.
The author Vinod Nair, is the Head of Research, Geojit Financial Services.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
