auto demand: Despite discounts, SUVs continue being vehicles of choice: Srikumar Krishnamurthy, ICRA

Srikumar Krishnamurthy, Vice President & Co-Group Head, Corporate Ratings, ICRA, says the recovery or the bounce back post-COVID was pretty significant in the PV segment in particular and even compared to the global markets, we were outgrowing. There is some amount of elevated base that has crept in. So, factors like the pent-up demand and the new launches in SUVs, all these had supported the growth in the last couple of years. One side is that we are talking from a slightly higher base and the fascination for the SUVs continues to be there. While it is a temporary phase we are seeing some discounting happening, but over the long term structurally we see that utility vehicles are the kind of vehicle of choice.

Just three months ago we were all discussing how the waiting periods are high, things were looking very rosy for the entire auto sector, plus this entire push coming in from the government and the entire regulatory easing, whether it is hybrid cars or a push towards CNG. What has changed materially in the last three months? Has the waiting period now changed due to higher inventory in the system?
Srikumar Krishnamurthy: We will have to acknowledge that we have been one of the fastest-growing markets within the PV segment, even globally. Certainly, all segments and all sectors had an impact during the COVID period, but the recovery or the bounce back post-COVID was pretty significant in the PV segment in particular and even compared to the global markets, we were outgrowing.

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So, there is some amount of elevated base that has crept in. Certainly, factors like the pent-up demand and the new launches in SUVs, all these had supported the growth in the last couple of years. One side is that we are talking from a slightly higher base and the fascination for the SUVs continues to be there. While it is a temporary phase we are seeing some discounting happening, but over the long term structurally we see that utility vehicles are the kind of vehicle of choice.

Having said that, two factors will have to be considered: the fact that there is a pile-up of inventory because of the softened demand that we have observed in the last two to three months amidst the election timeframe and also to some extent the heatwaves, etc, and also the other aspect is the OE’s approach ahead of the festive season. They try to have a consumer-friendly pricing environment. We expect this to be a temporary phase, but post-election, we expect the production schedule to be altered.

Right now, M&M is saying this is just a celebratory offer and not a price cut. Do you agree with that? Is it a price cut or do you think it is just an offer for that consumer sentiment ahead of the festive season that you are saying?
Srikumar Krishnamurthy: The way one will have to look at is that till at least last month, the kind of discounts that were observed in the market were in hatchbacks, sedans, and electric vehicles. If this has to extend to SUVs as well, one cannot ignore the fact that there is a softness in demand. From a consumer mindset also, everyone looks for something that comes with better pricing and a new variant per se.

So, it is more a marketing strategy possibly to push volumes just ahead of the season per se. But we cannot ignore the fact that there is a high base that we are coming from and also some softened demand. So, one will have to wait and watch over the next few quarters in terms of how the demand pans.

What is the comparative intensity? Every OEM out there is launching an SUV now. How do you see the market share? Do you think the market share will get fragmented? The companies, the bigger ones, which have up till now cornered giant market shares will have to give up some and things will get fragmented because of massive offerings.
Srikumar Krishnamurthy: Consolidation is certainly happening with the rollouts of multiple models. Rather than the markets, I would like to comment about the segment share, and how it had panned out. Earlier, 40% of vehicles used to be utility vehicles, now it is 60% plus, and based on the kind of launches and also the phasing out or the higher discounts being seen in the entry vehicles, it appears that the utility vehicles will continue to have their fair share of run in the market for some more time. Policy supporting, we would continue to see more players getting into the market and the competitive intensity remains high in the industry.

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