Customers aspiring to buy entry-level cars or those looking for an upgrade to higher-priced models are postponing decisions as the COVID-19 pandemic has hit their income sentiment significantly, a report said on Monday. At the same time, sales of premium segment cars are expected to go up on account of resilient income of affluent buyers, while the share of higher-priced two-wheelers is likely to remain around 40 percent, CRISIL said in its report.
Cars priced above Rs 10 lakh fall in the premium segment while two-wheelers costing Rs 70,000 and above come in the higher prices category. While supply chain issues have affected a raft of vehicle manufacturers, models priced higher than the entry level have continued to find buyers, the report said.
In India, usually lower-priced cars are bought by first-time users or those upgrading from used vehicles. In the last fiscal, premium segment cars sold five times faster than those with lower sticker prices, and notched up around 38 percent year-on-year growth compared with around 7 percent growth for the latter, CRISIL said.
Consequently, the market share of premium cars rose 500 basis points to around 30 percent last fiscal, compared with around 25 percent in FY21, it said. Going forward, CRISIL said, it expects the share of higher-priced cars to remain higher at around 30 percent due to resilient incomes of affluent buyers and traction for new models. Also, the share of higher-priced two-wheelers will remain at around 40 percent on the back of increasing consumer preference and the availability of more models.
The report noted that there was a stark difference in the income sentiment of the respective target consumers, a sharper rise in the prices of lower-end cars, fewer options (some manufacturers exited the segment), and a slew of new launches, that have increased the preference for higher-priced cars.
The report also said estimates suggest the employee cost of large and medium companies — a proxy for income sentiment among affluent buyers of higher-priced cars — has increased way more than those of small and medium-sized companies that account for a larger proportion of lower-priced car buyers.
Higher prices at lower end, shift in consumer preference
On top of the muted income sentiment, there has been a 15-20 percent cumulative increase in the sticker price of lower-end cars over the past four fiscals due to increased stringency of safety regulations (mandating anti-lock braking system, front row airbags, speed warning alarms, seat belt reminder, rear parking sensors, crash test norms) and the transition to BS-Vi emission norms, which have been a drag on sales, according to CRISIL Research. Consumer preference has been gradually shifting from low-priced models that did well previously to similarly-priced utility vehicles, with some customers even preferring to buy a used car in the costlier segment than spend an equivalent amount on a new lower-segment car, it said.
Sales of best-selling low-priced vehicles such as Maruti's Alto, Swift, Baleno, Vitara Brezza, Celerio, and Dzire; and Hyundai's i10 and i20, which cumulatively accounted for around 56 percent of the lower-priced cars sold in fiscal 2019, have been on a decline for three fiscal years now, as per the report. It also said there were only around 39 models of lower-priced cars available last fiscal as compared to around 54 in FY16.
Additionally, the lower-priced car segment had little to show with new launches since fiscal 2020, contributing to only around 15 percent of total share within lower-priced cars in FY22. But the drive was different for higher-priced cars. Bestselling models such as Hyundai Creta, Maruti Ertiga and Ciaz, Mahindra Bolero and Scorpio, Honda City, Ford Ecosport and Toyota Innova cumulatively accounted for around 68 percent of the higher-priced cars sold in fiscal 2019, witnessing a decline in sales since fiscal FY19, CRISIL said.
However, the new launches have outperformed, filing in the gap. Though the number of models available was stable at 53-55, new launches since fiscal 2020 contributed significantly to the overall sales volume in the segment, it said. Stating that as many as 19 of these racked up around 32 percent of volume share within the higher-priced segment in fiscal 2022, it said the higher-priced new models doing well are Kia Seltos, Maruti XL6, MG Hector, Mahindra XUV700 and Hyundai Alcazar.
Similarly, over the past 5-6 fiscals, two-wheelers priced over Rs 70,000 have consistently sold more than those that cost less, owing to factors such as a 40- 45 percent increase in the cost of ownership and a 50-55 percent increase in the cost of acquisition since fiscal 2015, the report said.
The cost of ownership has risen significantly because of tighter regulatory norms (safety and BS-VI) and price hikes by vehicle makers to offset higher input costs. This has materially dampened consumer sentiment and offtake of lower-priced two-wheelers, according to the report. Vehicle makers have also been focusing more on the higher-priced segments because of changing consumer preference. In fiscal 2015, the lower-priced segment had 29 models whereas at present there are only 12 models in this segment.
On the contrary, models in the higher-priced segments have risen from 71 in fiscal 2015 to 93 last fiscal, propelling sales, the report said.
