New vehicle sales have got off to a positive start for FY15/16 (April-March). Over the first quarter of the fiscal year, new passenger car (PC) sales were up by 8.57% y-o-y, at 482,332 units, with commercial vehicle (CV) sales up by 3.55% y-o-y, at 146,159 units, according to figures from the Society of Indian Automobile Manufacturers (SIAM).
However, June itself was something of a disappointment, with new vehicle sales dropping by 0.5% y-o-y, to 217,642 units. This marked the first monthly decline in Indian new vehicle sales since October 2014. Sales of utility vehicles declined 5.9%, while demand for vans fell 7.2%. According to a report in the Economic Times, the temporary closure of car production facilities for maintenance in June contributed to the decline in sales. 'Three major carmakers have shut their factories for annual maintenance that has resulted in this minor fall. The retail sales have been moderate, but the car dispatches from factories affected the overall industry performance in June,' said SIAM president Vikram Kirloskar.
Looking forward, BMI remains positive on the new auto sales outlook for FY15/16, but we are currently targeting 5.9% growth for PC sales over the full year, which will indicate a slight slowing down from the growth rate seen over Q1. For CVs, we are now targeting 4% growth over the full year, in line with the Q1 performance.
Overall, while we acknowledge that India's economy is gaining momentum, our belief is that it will be gradual, and we forecast real GDP growth to come in at 7.6% in FY2015/16 (April-March) (versus 7.3% in FY2014/15), which is less optimistic than the government's projected rate of 8.0-8.5%. Political hurdles to important reforms - such as the amendment of the land acquisition bill -will cap India's growth potential despite a modest pickup in investment owing to an improved business environment and monetary easing by the Reserve Bank of India (RBI).
To deal with the positives first, there are signs of moderate improvements in India's investment cycle, and we expect it to pick up gradually over the course of FY2015/16 as a result of various initiatives by the government such as boosting the manufacturing sector (through the 'Make In India' campaign) and fast tracking infrastructure projects. Another major positive for the autos sector (in particular the PC and LCV segments) is our belief that private consumption will increase at a strong average of average of 6.1% per annum in real terms over the next decade, underpinned by rising real GDP per capita, very strong demographic trends, and increasing leverage in the economy.
On the negative side, although we are expecting India's investment cycle to pick up, the implementation of infrastructure projects on the ground will remain slow as we continue to believe that the chances of signing the amendment to the land acquisition bill into law will be rather slim in the near-term.
One further near-term concern is posed by rising inflation. India's headline consumer price inflation (CPI) ticked up to 5.4% y-o-y in June from May's print of 5.0% y-o-y, and we expect the Reserve Bank of India (RBI) to keep its repurchase (repo) rate steady at 7.25% at its upcoming August meeting, as it remains cautious with regard to the potential upside risks to inflation. This removes one potential source of near-term stimulus to the Indian new vehicle sales market, as lower rates will not be passed onto auto loans. That said, we believe that inflation in India will remain relatively subdued over the medium term due to improvements in supply side issues, in turn providing room for the Indian central bank to reduce its key policy rate by 25bps to 7.00% by March 2016, in an effort to support the recovering economy. Lower interest rates at this stage could provide a fillip to FY16/17 new auto sales, which we currently see growing by 6.1% y-o-y.
Turning to production, with Prime Minister Narendra Modi having now spent over 12 months in office, the impact of his 'Make In India' policy is already apparent in the autos sector. BMI's own tracking of auto production investment projects shows that, since the policy was launched in late September 2014, investment projects worth at least INR306bn (USD4.8bn) have been announced in the country, with the actual total likely to be higher as some projects were announced without values.
The projects are far-reaching, covering both original equipment manufacturers (OEMs) and component suppliers, domestic companies and international majors. While some projects may have already been in the pipeline regardless of government policy, some companies, such as VW, have named 'Make In India' as a factor in their decision. A key theme is that companies are looking to make India a global hub for exports and in some cases at the expense of other countries.
The Indian new motorcycle market (16mn units sold in FY14/15) is five times the size of its four-wheeled equivalent (3.2mn units sold in FY14/15). Looking forward, BMI expects this dominance by two-wheeled vehicles to continue over our forecast period to 2019. This is because motorcycles are cheaper and, therefore, more affordable to Indian consumers.
Looking forward, BMI believes that the long-term outlook remains positive for the motorcycle segment, given low penetration rates; with around 23% of urban households and less than 10% of rural households owning a motorcycle (penetration in neighbouring countries such as Thailand and Malaysia is six times higher). We expect demand to remain strong for the next four years, with unit sales targeted to reach 23.4mn in 2019. As a testament to the country's growing market, Honda has announced that it will build the world's largest scooter plant in Gujarat by end-2015.