SUVs to account for 62% of total PV sales by FY25, says CRISIL

CRISIL reckons that this preference is expected to further grow backed by a healthy pipeline of new model launches across price points

Even as hatchback and sedan sales are expected to remain muted in the next few quarters, robust demand for Sports Utility Vehicles (SUVs) such as Hyundai Creta, Mahindra XUV7OO, Kia Seltos, Maruti Suzuki Grand Vitara, Toyota Hyryder, Honda Elevate, Tata Nexon, etc., will continue to drive demand for passenger vehicles (PV) in the current and next fiscal.

According to ratings agency CRISIL, share of SUVs in the total passenger vehicle (PV) sales in India is expected to increase from 51 percent in financial year 2022-23 to 62 percent in the fiscal ending March 2025.

“While the overall PV volume is seen rising 5-7 percent next fiscal, we expect demand for SUVs to accelerate at twice the pace at over 12 percent driven by array of feature-laden launches at competitive price points, varied technology options including hybrid and electric, and increased access to credit,” said Anuj Sethi, Senior Director, CRISIL Ratings.

PV volumes will ascend to a new peak for the third straight time next fiscal, growing 5-7 percent on a high base of 6-8 percent estimated for the current fiscal, as SUVs race ahead even as demand for cars and exports remain muted.

As per industry players, some of the key growth drivers of SUV segment are changing consumer preferences, improved road conditions, more safety and comfort features, increased income levels, urbanisation, customisation options, rugged appeal, and new launches.

In contrast, demand for cars (small hatchbacks) is seen slowing this fiscal too due to the ongoing weakness in the rural market and lower affordability at the entry level. The cost of vehicles has risen in the last three to four years as vehicle manufacturers have been passing on higher commodity prices in order to comply with stringent regulations on safety and emissions (BS-VI), as per CRISIL.

It may be recalled that PV wholesales in India touched a record high of 41.08 lakh units in 2023, growing by 8.3 percent over the previous year. The sales were largely driven by SUVs, which accounted for almost half of the total dispatches from manufacturers to dealers.

India’s leading Utility Vehiclemaker Mahindra and Mahindra (M&M) reclaimed the market leadership in SUVs (at 21.9 percent share) during the fourth quarter of last calendar year. While the country’s leading carmaker Maruti Suzuki India Limited (MSIL) became the highest SUV seller during Q3 CY 2023, it eventually lost the crown to Mahindra in the subsequent quarter (at 20 percent market).

The same CRISIL report claims that a significant change in consumer preference has cranked up demand for SUVs, leading to its marketshare doubling to ~60 percent of total domestic volume this fiscal from ~28 percent before the pandemic in fiscal 2019.  It reckons that this preference is expected to further grow backed by a healthy pipeline of new model launches across price points, including electric variants, and normalised availability of semiconductors after a prolonged period of short supply.

Healthy margins to propel more investments by OEMs

As per CRISIL, the increasing share of SUVs with higher realisations, along with stable commodity prices and full benefit of price hikes executed last fiscal have resulted in operating margin expansion of manufacturers by ~200 basis points to ~11.0 percent this fiscal. A further improvement in sales mix in favour of SUVs can take that number to 11.5 per-12.5 percent next fiscal, as per its projections.

Furthermore, better cash generation, along with strong balance sheet and robust liquidity will support funding of sizeable capital expenditure (capex) to set up additional capacity, obviating the need for material debt addition and keeping credit profiles of PV makers stable, as per CRISIL.

As Naren Kartic K., Associate Director, CRISIL Ratings puts it, “Capacity utilisation is expected to peak at ~85% this fiscal, and given that strong demand for SUVs is continuing, PV makers are incurring ~Rs 44,000 crore capex in fiscals 2024 and 2025 — almost double compared with the past two fiscals.”

Meanwhile, CRISIL predicts that the share of PV exports is estimated to have slowed to 14 percent this fiscal compared with ~17 percent in fiscal 2019, mainly due to inflationary headwinds and limited availability of foreign exchange in key export markets — Latin America, south-east Asia and Africa — in the past two years.  It expects this trend to continue next fiscal too.