Maruti issues grim outlook for auto industry

New Delhi: India’s largest car maker Maruti Suzuki India Ltd believes growth in the domestic passenger vehicle industry may languish in the single digits for the next three years, painting a grim picture for a market that was once among the brightest spots in the global auto business.

add_main_imageNot only has the firm cut its forecast for the passenger car market to four million units by 2015-16, from its earlier projection of five million, but it has also said it is aiming at maintaining its current market share of 40%, and not chasing the 50% it once targeted.

Maruti chairman R.C. Bhargava attributes the muted estimates for market growth on the lack of political will, which he said was preventing the government from undertaking so-called second-generation reform initiatives to revive economic growth.NextMAds

Bhargava’s remarks are based on an internal market study undertaken by the company in October and presented to the management and the board in November, said two company officials familiar with the development who spoke on condition of anonymity.

Blaming the coalition government for not taking tough economic measures, Bhargava said in a phone interview on Tuesday that conditions are “fluid” and that the market would grow in the single digits for at least a year.

“If the government is not stable even after the upcoming general election (scheduled for 2014), single-digit growth will continue for another two years,” he said, and added that there are “enough (political) parties who will block anything sensible that comes up”.

Bhargava’s statement comes amid a market slowdown that has crippled sales in the world’s second fastest growing passenger car market. Between April and November, the first eight months of fiscal year 2012-13, sales of cars and sport utility vehicles have grown 9.62% to 1.75 million units, largely on the back of more demand for utility vehicles. In the same period in 2011-12, sales declined 0.5%. Indeed, the Society of Indian Automobile Manufacturers, a lobby group, revised its growth forecast down to 8-10% in October from the 11-13% it announced at the beginning of the fiscal year.

Bhargava said it was unlikely that car makers would sell five million vehicles by the middle of this decade as previously expected. “That is not going to happen unless things change miraculously... We are not going to grow the way we did a couple of years back,” he said.sixthMAds

In 2010-11, the passenger vehicle market grew 29.16% to 2.52 million units. In 2011-12, it grew 4.66% to 2.61 million. The economy grew 8.4% the first year and 6.5% the second.

This fiscal year, however, growth has slowed. India’s gross domestic product (GDP) growth slowed to 5.3% in the quarter ended September (from 6.7% in the corresponding period a year ago and 5.5% the previous quarter). In the six months to September, the manufacturing sector grew 0.5%.

Data for the quarter ended September also showed private final consumption expenditure, a key indicator of consumer spending, near a 10-year low. Going by the numbers in the first half of the fiscal, economists expect India’s GDP growth to be around 5.5% in the current fiscal.

According to one of the Maruti officials mentioned in the first instance, the company expects the passenger vehicle industry to grow at 5% every year for the next three years. “At this rate, a target of four million units by 2015-16 may still be a distant reality,” this person said.

Still, 2013-14 may be a better year for the economy, said another car industry executive who spoke on condition of anonymity.

“The nature of the government’s functioning predicts populist measures to come ahead of next Lok Sabha polls, which will create general happiness in the market,” said this person. “This will be supported by some false growth based on deferred demand of this year and liquidity conditions in India getting better because other markets are not performing well.”

Indeed, the base effect (or a low number in the corresponding period a year ago making a smaller number look large or vice versa) will soon kick in, said an analyst, although he warned that taxes could play spoilsport.

“This means there will be growth next year. But one has to understand that automobiles are tax-heavy items and the levies determine the sales performance. Of late, we have seen a tendency of taxing automobiles more, which is not a healthy sign for the industry,” said Mahantesh Sabarad, senior vice-president (equity research) at Fortune Equity Brokers Pvt. Ltd.

There’s a possibility the government will miss the objectives laid out in its 10-year so-called auto mission plan, he added.

“Auto mission policy talks of $145 billion (around ₹ 8 trillion today) revenues by auto sector in 2016 from $34 billion in 2006. This is 15.6% CAGR (compounded annual growth rate). I would assume the split would be 11-12% by volume growth and 3.6-4.6% value growth,” Sabarad said.

The mission talks of the auto industry accounting for 10% of India’s GDP by 2016, from 5% in 2006, he said, but it continues to remain at 5-6%.

Based on its previous forecast of five million units, Maruti, the Indian arm of Suzuki Motor Corp., had decided to scale up its production capacity in order to maintain its 50% market share. Last year, the firm announced its first manufacturing facility outside the north Indian state of Haryana, where it has two factories. The expansion, in Gujarat’s Sanand area, is expected to add at least 1.2 million units to Maruti’s existing 1.8 million units production capacity.

Bhargava said the company has also downscaled its market share aspirations.

“The idea is to hold on the market share that we currently have as there are more companies who have entered the market and they are looking for a bigger chunk (of the market),” he said. “A 50% market share may not be possible in these conditions. Our target is to have 40%.”

Maruti’s market share has taken a beating after labour trouble disrupted its production in 2011 and 2012. From 45% in 2010-11, its market share fell to 39% in 2011-12 and is currently around 38%.

The second Maruti executive said the expansion in Gujarat would be subject to demand. “While investments will be made for a capacity of 250,000 units in the first phase, further expansion will depend on market conditions,” he added.

Maruti has previously said its total investment in Gujarat could add up to around ₹ 16,000 crore for a capacity of 1.2 million vehicles a year.

Remya Nair contributed to this story.