Share of utility vehicles in the overall sales of new cars is expected to be on an upward trajectory amid the growing popularity of such vehicles and automakers' reduced focus on compact hatchbacks owing to rising production costs, Fitch Ratings said on Friday.
The increasing share of higher-margin UV (Utility Vehicle) sales will help carmakers cushion the impact on production costs due to high commodity prices and compliance with additional safety standards, it said.
Citing SIAM (Society of Indian Automobile Manufacturers) data, Fitch said that UV's volume share in overall car sales increased to 49 percent in the previous fiscal, up from 28 percent in the year-ago period.
This underscores the rising popularity of UVs over hatchbacks and sedans, whose combined share dropped from 66 percent to 48 percent.
Within the UV category, the share of entry- and mid-level UVs in overall car sales rose to 38 percent in the financial year ended March 2022 from 20 percent in FY19, underscoring customers' shift in favor of vehicles offering more space and versatile road capabilities, it said.
The agency said that higher numbers of new launches in UVs compared to hatchbacks in the past few years have supported growth.
Fitch Ratings believe UVs are well-positioned to gain further share in overall car sales as UVs remain popular, particularly among upgraders and high-income customers who are typically less price-conscious than buyers of entry-level cars.
Entry- and mid-level UV sales rose by 21 percent year-on-year in FY21 and 35 percent in FY22, reflecting resilient demand despite the COVID-19 pandemic, it stated.
Still, the rising production costs will weigh on demand and profitability for the price-sensitive compact hatchbacks and sedans, according to the rating agency.
High commodity prices and more stringent vehicle safety and emission standards have caused a 20—30 percent increase in entry-level car prices since 2018, it said, adding that volume in this segment has continued to decline year-on-year since FY20.
In FY22, the share of entry-level cars stood 32 percent lower than FY19, reflecting the impact of higher prices and Covid-19 on demand, Fitch said.
Noting that there will be a further 3-5 percent cost impact from October this year when a regulation requiring additional airbags in cars comes into force, the rating agency said, in its view, Indian carmakers will focus more on the UV segment, particularly after considering its expanded share in overall car sales.
This could result in a lower number of new launches and potential model discontinuations in the entry-level segment, decreasing growth prospects, it stated.
The rating agency also said that it believes that healthy prospects in UVs will support domestic carmakers' volumes and profitability despite higher costs, citing the example of the 40 percent growth in the country's UV sales in FY22, which counterbalanced a 6 percent fall in entry-level car volume and supported overall 13 percent growth year-on-year, as per SIAM.
(With PTI inputs)