SUVs to drive passenger vehicle volume 5-7% next financial year: Crisil

NEW DELHI: Passenger vehicle volume is expected to ascend to a new peak for the third straight time next financial year, growing 5-7 percent on a high base of 6-8 percent estimated for the current year ending March 2024, according to Crisil Ratings.

This ascend is expected 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 percent next financial year, the rating agency said on Monday.

Better cash generation, along with a strong balance sheet and robust liquidity will support funding of sizeable capital expenditure to set up additional capacity, keeping credit profiles of passenger vehicle makers stable, the agency said.

A significant change in consumer preference has cranked up demand for SUVs leading to its market share doubling to 60 percent of total domestic volume this fiscal from 28 percent before the pandemic in fiscal 2019.

This preference is expected to further grow backed by a healthy pipeline of new model launches across price points, including electric variants, and normalized availability of semiconductors after a prolonged period of short supply.

"While the overall PV volume is seen rising 5-7 percent next fiscal, we expect demand for SUVs to accelerate at twice the pace at over 12 percent driven by an array of feature-laden launches at competitive price points, varied technology options including hybrid and electric, and increased access to credit," said Anuj Sethi, Senior Director, CRISIL Ratings.

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 passenger exports is estimated to have slowed to 14 percent this fiscal compared with 17 percent 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," Crisil Ratings said.

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 (100 basis points is equal to 1 percentage point) to 11.0 per cent this fiscal.

A further improvement in sales mix in favour of SUVs can take that number to 11.5-12.5 next fiscal, it said.