Indian auto sales (sum total of passenger vehicle and commercial vehicle sales) rose by 2.5% year-on-year (y-o-y) in the year ending March 2015, to 3,216,072 units, according to figures from the Society of Indian Automobile Manufacturers (SIAM). Breaking down the headline figure, passenger vehicle sales rose by 3.9% y-o-y, to 2,601,111 units. However, commercial vehicle sales dropped by 2.8% y-o-y, to 614,961 units.
Looking forward, BMI believes that the new autos sales outlook for FY15/16 is brighter than was the case in FY14/15. We are targeting 5.9% sales growth for the Indian new vehicle market in FY15/16, with new autos sales set to benefit from an improving economic backdrop. BMI's Country Risk team recently revised up its FY15/16 GDP growth forecast to 7.6% (from 7.3% previously). Overall, we believe that the economic reform drive in India continues to gather pace, which will help to spur investment.
Moreover, we believe that the start of a monetary easing cycle in India (two 25 basis point cuts were made to interest rates in January and March 2015) will help to lift credit growth in the country, which bodes well for infrastructure projects that have stalled due to a lack of funds. With inflation likely to recede over the medium term, we expect the Reserve Bank of India (RBI) to ease interest rates by a total of 50bps to 7.00% by March 2016, as it attempts to further support economic growth. This lower interest rate environment should also lead to lower rates for auto loans, boosting demand from Indian consumers reliant on car financing to make new vehicle purchases over the coming 12 months.
One challenge facing the auto sector at the start of FY15/16 is the impact of the January 2015 decision by the government to end the tax breaks offered to the auto sector when it was struggling in FY13/14. This means that the excise taxes on small cars, motorcycles, trucks and buses have increased to 12% from 8% previously, while the levy on sports utility vehicles (SUVs) has increased to 30% from 24%. Taxes on mid-size and large cars have risen to 24% from 20% and to 27% from 24%, respectively. This will clearly increase the cost of new cars to all Indian consumers.
That said, we remain bullish on the Indian auto sector and see its long-term sales trajectory intact owing to the under-penetrated nature of the market. Another positive development for the sector is the recent fall in crude oil prices, which has resulted in both petrol and diesel prices declining at the pump in recent months. Indeed, in April 2015 the state-run Indian Oil Corporation cut the price of diesel and petrol twice, taking the price of a litre of petrol (in Delhi) to INR59.20 and diesel to INR47.20. Lower pump prices will help to offset some of the pain of higher excise taxes on vehicles and help set a floor on auto demand.
Over the medium term, BMI remains optimistic that economic reforms being pursued by the new government will lead to a stronger Indian economy. As such, we believe that greater economic prosperity will lead to a positive increase in new vehicle sales, targeting 33.2% growth over our forecast period, to reach 4.29mn by 2019.
In 2014, India remained the world's sixth-largest auto producing nation, producing 3,840,160 vehicles, down by 1.5% y-o-y, according to figures from OICA. Breaking down this headline figure, India produced 3,158,215 cars and 681,945 commercial vehicles. In April 2015, German carmaker Volkswagen (VW) announced plans to establish India as a low-cost manufacturing hub, which will serve both emerging and developed export markets. In addition, the company will invest INR15bn (USD239.50mn) in localisation initiatives as part of Indian Prime Minister Narendra Modi's 'Make in India' initiative, according to Volkswagen India chief representative Mahesh Kodumudi. In 2015, the company expects to export 70,000 cars, up from 65,000 in 2014. Moreover, the automaker intends to increase production capacity at its Chakan and Aurangabad facilities to 200,000 units by 2018.
The Indian new motorcycle market (16mn units sold in FY/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. In FY14/15, Indian new three-wheeler sales rose by 10.8%, to 531,927 units. New two-wheeler sales rose by 8%, to 16,004,581 units, according to figures from SIAM.
Looking forward, BMI believes that the long-term outlook is 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 like 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.
India is also an important exporter of motorcycles. In FY14/15, Hero MotoCorp was India's largest scooter exporter with total volumes of 79,956 units, up by 356.24% y-o-y. The figures narrowly surpassed those of Honda Motorcycle & Scooter India (HMSI), which rose by 49.84% to reach 51,932 units. Hero MotoCorp's export growth followed a one-time order from Sri Lanka for nearly 45,000 units.