Fitch Rating: Rising sales of popular UVs in India to support automakers' profitability

20 May 2022 , 03:36 PM

Utility vehicles’ (UV) share of new car sales in India will continue to rise amid their high popularity as automakers reduce focus on compact hatchbacks amid rising production costs, says Fitch Ratings. The increasing share of higher-margin UV sales will help carmakers cushion the impact of high commodity prices and additional vehicle safety standards on production costs.

UV’s volume share in overall car sales increased to 49% in the financial year ended March 2022 (FY22) from 28% in FY19, according to Society of Indian Automobile Manufacturers (SIAM) data. This underscores the rising popularity of UVs over hatchbacks and sedans, whose combined share dropped from 66% to 48%.

Within the UV category, the share of entry and mid-level UV in overall car sales rose to 38% in FY22 from 20% in FY19, underscoring customers’ shift in favour of vehicles offering more space and versatile road capabilities. Higher numbers of new launches in UVs compared to hatchbacks in the past few years have also supported growth.

We believe UVs are well positioned to gain further share in overall car sales. UVs remain popular, particular among upgraders and high-income customers who are typically less price conscious than buyers of entry level cars. Entry and mid-level UV sales rose by 21% yoy in FY21 and 35% in FY22, reflecting resilient demand despite the pandemic.

Still, the rising production costs will weigh on demand and profitability for the price-sensitive compact hatchbacks and sedans. High commodity prices and more stringent vehicle safety and emission standards have caused nearly a 20%-30% increase in entry-level car prices since 2018. Volume in this segment has continued to decline yoy since FY20. In FY22, it stood 32% lower than FY19, reflecting the impact of higher prices and Covid-19 on demand.

There will be a further 3%-5% cost impact from October 2022 when a regulation requiring additional airbags in cars comes into force. Indian carmakers will focus more on the UV segment, particularly after considering its expanded share in overall car sales, in Fitch’s view. This could result in lower number of new launches and potential model discontinuations in the entry-level segment, decreasing growth prospects.

We believe that healthy prospects in UVs will support Indian carmakers’ volumes and profitability despite higher costs. For example, robust 40% growth in India’s UV sales in FY22 counterbalanced a 6% fall in entry-level car volume and supported overall 13% growth yoy, according to SIAM. Higher share of UVs in sales mix supported Tata Motors Limited’s considerably improved operating margins and stable profitability for Maruti Suzuki India Limited.