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Budget expectations: Automobile sector

31 Jan 2022 , 06:35 PM

From a Budget standpoint, the automobile industry will remain an indirect beneficiary of the Government’s measures to boost consumption and investments in the infrastructure space. This is especially important in view of the fact that automobile industry sales in India have stagnated over the past few years owing to steadily rising vehicle prices on one hand and subdued consumer sentiments on the other. That apart, the industry has been emphasising on the need to rationalise the GST structure across different component segments and reintroduce the higher income tax benefit on R&D investments (in line with the previous years). While it remains to be seen whether these requests are addressed or not but the Government’s focus on ‘Atmanirbhar Bharat,’ encouraging cleaner fuels/technologies including initiatives to disincentivise ICE vehicles, will remain the key areas to watch out in the upcoming Budget from the automotive sector’s perspective.

The Indian automobile industry has weathered multiple headwinds over the past 18-24 months. From complete closure of business activity during the first wave of the Covid-19 pandemic to managing sharp inflation in commodity prices and semiconductor chip shortage, the industry has seen it all. The demand environment too has been a mixed bag. While passenger vehicle (PV) sales have been resilient, the two-wheeler (2W) industry is staring at nine-year low domestic sales by the end of FY2022. Owing to the steady increase in vehicle prices (a result of change in technology, safety standards and commodity inflation) and relatively higher impact of the pandemic on lower income families, two-wheeler sales have been hit the most and are unlikely to recover meaningfully in the near term.

Comparatively, the Commercial Vehicles (CVs) sales have been on an improving trend, aided by a pick-up in demand from infrastructure sectors and general business activity, especially from sectors like e-commerce and express delivery. While the segment will report healthy sales growth in FY2022, (expected to be ~18-22%), it will still be ~30-32% short of the all-time peak achieved in FY2019. On the agricultural front, ICRA expects tractor sales to witness a marginal correction (somewhere between -2 to -6% in FY2022), primarily because of a very high base (i.e. nine lac tractors were sold in FY2021) and delayed harvest season due to prolonged and uneven monsoons. That said, shift towards mechanisation is clearly visible as demand for other agricultural implements such as harvesters etc. remained buoyant. 

Fiscal 2022 can also be considered as the year of reckoning for India’s still-in-infancy Electric Vehicle segment. Although the overall EV volumes (~95% of which was the two-wheeler (47%) and three-wheeler segment (48%)) are still a fraction of the overall industry sales, the momentum is encouraging. Selectively, EVs have started making a mark in segments like scooters and three- wheelers as expected. To give a perspective, high-speed EV scooter sales at 24,737 units in December 2021 accounted for 9% of the total scooter sales. We expect this momentum to only gain pace going forward as a) OEMs ramp-up production and launch new models, and b) consumer acceptance further improves with easing concerns on viability (i.e. narrowing cost of ownership with ICE counterparts), mileage, and financing.

Besides extending the tenor of the FAME II scheme and sweetening the incentive structure for the e-two-wheeler segment, the Government of India also rolled out significant policies to create the local EV ecosystem in India. An allocation of Rs. 18,100 crores and Rs. 25,938 crores for manufacturing advance chemistry cell (including Lithium Ion batteries), EVs and technology-oriented components, respectively were steps in this direction. The ball is now clearly in the private sector’s court to move projects from the drawing board stage to the ground with technologies and solutions viable for the Indian market. In ICRA’s view, the ability to onboard OEMs upfront, tie-up technology and input material sourcing will be critical in the battery segment, given the large capital investment.  

We expect investments of approximately Rs. 25,000-30,000 crores in the EV ecosystem over the next five years with battery cell manufacturing hogging the limelight. Different business models will also emerge in the EV charging infrastructure as well.

The author of this article is Mr. Shamsher Dewan, Vice President & Group Head — Corporate Ratings, ICRA Limited

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com

Related Tags

  • automobile industry
  • Budget Expectation quote from ICRA
  • electric vehicles segment
  • EV segment
  • Industry leader’s expectation
  • PLI schemes
  • Pre-budget quote
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