Car companies likely to see high pressure on profitability

Mumbai: Despite registering a healthy growth in domestic passenger vehicle sales during the second quarter, the industry’s profitability metrics are unlikely to see any material improvement in the near term.

Rating agency Icra noted that the likely sustenance of discounts-led sales push resulting from the restricted pricing power in the wake of intense competition along with higher employee cost and investment towards new product development would keep the profit margins of the industry under check.

“Also, the recent trend of rising commodity prices will keep profitability margin of original equipment manufacturers  under check in the near to medium term. The market share in the domestic passenger vehicle (PV) segment is expected to remain concentrated over the medium term, with the top five players constituting over 80 per cent of the overall market. This implies that profitability pressures on the relatively low volume players may be even higher, resulting in sustained dependence on external financing to fund losses and capital expenditure requirements,” Icra  added.

Domestic PV wholesale dispatches grew by healthy 13.4 per cent during Q2FY18 supported by re-stocking of inventory by dealers after the implementation of GST, favourable demand momentum and customer sentiments, recovery in rural income as well as moderate cost of car ownership.

However, Icra pointed out that the overall capacity utilisation remains modest. In order to address the issue, few multinational OEMs have started using Indian operations as an export hub for small cars, which has helped them improve the overall utilisation of the Indian operations.

Given the low penetration levels in the country, Subrata Ray, senior group VP, corporate sector ratings at Icra believes that the long-term prospects of the industry remains favourable.  “The cost of car ownership continues to moderate on account of falling interest rate and moderate fuel prices. We expect domestic PV sales growth to grow by 9-10 per cent during FY18 and we maintain a 9-11 per cent CAGR estimate over the next five fiscals. Growth rate could accelerate further by 100-150 basis points in case of speedier recovery in economic activity,” he added.