Long-term demand drivers for passenger cars in India
The demand for passenger cars is driven by greater affordability, which
is driven by the following factors:
Rapid expansion in addressable market, led by increase
in income
The addressable households tripled from 2003-04 to 2008-09 led by
increase in per capita income. The number of addressable households grew from
2003-04 to 2007-08, mainly due to higher affordability, led by increase in per
capita income. However, in 2008-09, the size of the addressable market
increased on account of the fall in car prices due to reduction in excise
duties on small cars from 16 per cent to 8 per cent.
In the next 5 years, the addressable households are likely to double
driven by the increase in per capita income and reduction in the entry level
prices of cars. Fall in prices due to intensifying competition in the small car
segment with the launch of ultra low-cost cars like Tata Nano is likely
to increase the size of the addressable market substantially in 2009-10.
However, growth in affordability during 2009-10 to 2013-14 is expected to be
driven by the increase in per capita income.
Softening interest rates and falling prices
The passenger car industry has benefited with a significant increase in
affordability due to decrease in EMIs in the past few years. Interest rates
have fallen to 11 per cent in 2005-06 vis-à-vis 17 per cent during 2000-01.
However, interest rates increased by 250-275 bps during 2006-07 and 2007-08.
However, EMIs were balanced by increasing the tenor. Interest rates peaked in
October 2008, touching levels of 14-16 per cent. Since then, rates have
softened and as of June 2009, interest rates are in the range of 11-13 per
cent. Decrease in prices due to intensifying competition with the new launches
in the small segment, backed by discounts on volume-generating old models, will
continue to boost demand.
New launches
Car sales increase significantly when new models are launched in the
market. The launch of new models tempts customers to bring forward their
decision to purchase the vehicle. With the increasing intensity of competition
amongst players, the frequency of new model launches has increased. These
launches planned by existing and new players in the domestic market will
continue to drive demand. Further, launch of new models at competitive price
points will also aid to woo customers for new purchases, given low penetration
across segments.
Reduction in excise duty
Reduction in excise duty reduces the prices of cars, which if passed on
by OEMs, increase affordability for buyers. In December 2008, there was a cut
in excise duty from 12 per cent to 8 per cent on small cars (having length less
than 4,000 mm and having engine capacity of less than 1,200 cc for petrol cars
and less than 1,500 cc for diesel cars). For other cars and utility vehicles,
the excise duty was reduced from 24 per cent to 20 per cent. As a result, the
prices of small cars have declined, leading to rise in demand on account of
lower cost of ownership and growth in the addressable market.
Shorter holding period pushes up demand for second
cars
Reduction in the average holding period will also result in increase in
the sales of passenger cars especially in mini, compact and mid-size segments.
The average holding period is estimated to have shrunk from 5-6 years in
2000-01 to 3-4 years in 2008-09, implying frequent upgradation to another model
from the same or higher segment.
Domestic cars and UVs to grow at a CAGR of 11.5 per
cent
The domestic passenger cars and UVs industry registered CAGR of 11.5 per
cent in the last 5 years, mainly driven by growth in the compact car segment.
This segment grew at a CAGR of 19.1 per cent.
CRISIL Research expects the annual domestic demand for passenger cars
and UVs to touch 2.69 million units in 2013-14 from 1.55 million units in
2008-09, growing at a CAGR of 11.6 per cent. Domestic demand is a function of
affordability, determined threshold income and players' actions in terms of
price changes. Rising affordability due to the fall in car prices with the
launch of ultra low-cost car Tata Nano and new model launches is likely
to boost demand.
