The automobile industry is a classic example of oligopoly being capital intensive in nature that plays an important role in the economy and also a significant impact on supply chain and logistics. India is a big market for personal vehicles and Agriculture farm vehicles.
The industry has manufactured 22.6 million vehicles including Passenger Vehicles, Commercial Vehicles, Three Wheelers, Two Wheelers and Quadricycles and exported 4.1 Million vehicles in FY21 as compared to production of 26 million vehicles and export of 4.1 Million vehicles in FY20. The demand is expected to take a hit in the first quarter of 2021 due to lockdowns and restrictions to curb the second wave of COVID-19.
Indian auto industry has a dominant position in the international heavy vehicles arena as it is the largest tractor manufacturer, second-largest bus manufacturer and third largest heavy trucks manufacturer in the world.
The pandemic has taken a toll on the manufacturers as key automotive hubs in India remained closed due to some variation of a lockdown for most of May amid the second wave of coronavirus.
Manufacturers were forced to halt production and curtail the spread of infection within factories. They had to take this step to prevent further piling up on inventory as showrooms are not working and therefore it would not be wise to ting up working capital.
The electric vehicle (EV) market is expected to grow at CAGR of 44 percent between 2020-2027 and is expected to hit 6.34 million units annual sales by 2027. The EV industry will create five crore direct and indirect jobs by 2030. Market size of $50 billion for the financing of EVs in 2030 has been identified as about 80 percent of the current size of India's retail vehicle finance industry, worth $60 billion today. In April-March 2021, overall automobile exports registered a degrowth of 13 percent. Passenger vehicles exports marginally declined by 39 percent and two-wheeler exports registered a degrowth of 7 percent in April-March 2021 over the same period last year. India's passenger vehicle industry is expected to post a growth of 22-25 percent in FY22.
Industry experts say this is an unprecedented time with no clarity on the production timelines. The biggest challenge is to have streamlined production with shortages of multiple products, going much beyond the chips as the global container crisis deepens with every passing day.
The pick-up in the auto industry last year was due to economic recovery and cheaper credit as a result of an accommodative stance of RBI. However, inflation has been on the rise for the past year and therefore it may affect the buying preferences of the customers. The industry seems to sustain once the pandemic comes under control and the economic uncertainty is gone. The Nifty Auto index has been rising from its support level and the level of 11,100 is a crucial level and breakout above it is expected to give way for a new rally. Investors may hold positions for the medium to long term.