Capex to increase, yet healthy balance sheets and improving cash flows support credit profiles.
Passenger vehicle (PV) volume will ascend to a new peak for the third straight time next fiscal, growing 5-7% on a high base of 6-8% estimated for the current fiscal, as sport utility vehicles (SUVs) race ahead even as demand for cars and exports remain muted.
Healthy volume growth of the SUV segment, which enjoys higher margin, will steer an improvement in operating margin to 11.5%-12.5% next fiscal. Better cash generation, along with strong balance sheet and robust liquidity will support funding of sizeable capital expenditure to set up additional capacity, obviating the need for material debt addition and keeping credit profiles of PV makers stable.
A CRISIL Ratings analysis of six PV makers, accounting for over 80% of the market, indicates as much.
A significant change in consumer preference has cranked up demand for SUVs leading to its market share doubling to ~60% of total domestic volume this fiscal from ~28% before the pandemic in fiscal 2019 (see chart 1). This preference is expected to further grow backed by a healthy pipeline of new model launches across price points, including electric variants, and normalised availability of semiconductors after a prolonged period of short supply.
Says Anuj Sethi, Senior Director, CRISIL Ratings, “While the overall PV volume is seen rising 5-7% next fiscal, we expect demand for SUVs to accelerate at twice the pace at over 12% driven by array of feature-laden launches at competitive price points, varied technology options including hybrid and electric, and increased access to credit.”
In contrast, demand for cars is seen slowing this fiscal too due to the ongoing weakness in the rural market and lower affordability at the entry level. The cost of vehicles has risen in the past 3-4 years as manufacturers have been passing on higher commodity prices and have had to comply with more stringent regulations on safety and emissions.
The situation is similar on the exports front. The share of PV exports is estimated to have slowed to 14% this fiscal compared with ~17% in fiscal 2019, mainly due to inflationary headwinds and limited availability of foreign exchange in key export markets — Latin America, south-east Asia and Africa — in the past two years. This trend is expected to continue next fiscal.
But increasing share of SUVs with higher realisations, along with stable commodity prices and full benefit of price hikes executed last fiscal have resulted in operating margin expansion of manufacturers by ~200 basis points to ~11.0% this fiscal. A further improvement in sales mix in favour of SUVs can take that number to 11.5%-12.5% next fiscal.
Says Naren Kartic.K, Associate Director, CRISIL Ratings, “Capacity utilisation is expected to peak at ~85% this fiscal, and given that strong demand for SUVs is continuing, PV makers are incurring ~Rs 44,000 crore capex in fiscals 2024 and 2025 — almost double compared with the past two fiscals. But healthy cash accrual and surplus will ensure reliance on external borrowings remaining low, keeping the credit profiles of manufacturers in the CRISIL Ratings portfolio stable.”
