Fitch: Lower Ownership Costs Support Stable Outlook for Indian Autos

Fitch Ratings-Singapore/Mumbai: Falling vehicle ownership costs resulting from low fuel prices, new product launches in the passenger and two-wheeler vehicle segments and Fitch Ratings' expectation that India will maintain GDP growth of around 7.5% over the financial year to end-March 2017 (FY17) underpin Fitch's stable outlook for India's automobile sector.

With consensus expectations of better monsoon rains in FY17 and new model launches intensifying competition in the passenger and two-wheeler segments, Fitch believes replacement demand will increase, supporting commercial vehicle demand. In addition, a 23.5% salary hike for government employees, effective in 2016, will provide a one-time demand boost to all automobile segments.

Robust macroeconomic expansion in FY16 supported the 7.2% growth in Indian domestic passenger vehicle sales (FY15: 3.9%) to 2.8 million units. Commercial vehicle sales, which were also boosted by a revival in the mining sector, increased 11.5% (FY15: -2.8%). Fitch expects the strong growth to be sustained into the following financial year.

Sale volumes in the three-wheeler segment grew by a modest 1% (FY15: 10.9%) and in the two-wheeler segment by 3% (FY15: 7.9%), as rural demand was adversely affected by a poor monsoon in FY16.

The Indian automobile industry, whose total FY16 sales grew 35% to 24.1 million units since FY11, primarily caters to the domestic market. Domestic sales accounted for 85% of total vehicle sales in FY16, while exports accounted for the balance. India's sizable rural- and middle-income population drives demand for two-wheelers, which accounted for 80% of FY16 domestic vehicle sales. Passenger vehicles constituted 13% of sales, while commercial and three-wheeler sales were 3% each of total vehicle sales.