Passenger vehicle volumes could grow 8%-10% year-on-year in 2023-24 as the pent-up demand normalises, according to India Ratings and Research (Ind-Ra).

The supply chain situation on account of the shortage of semiconductor chips seems to have eased over the past one year; however, the industry continues to face production losses albeit at a much reduced rate, the ratings agency says.

Ind-Ra has maintained a neutral outlook for the auto sector for FY24, as domestic industry segments are likely to continue to recover, although growth rates could moderate on a yearly basis. The ratings agency expects the domestic sales volumes to grow 7%-10% year-on-year in FY24, after rising 19%-21% in FY23.

Increased cost of ownership and a slower revival in the purchasing power of lower-end consumers will continue to be the headwinds for two-wheelers, limiting the growth at 7%-10% year-on-year for FY24, it says.

Ind-Ra expects internal combustion engine two-wheelers, particularly scooters, could see some shift towards electric variants due to the reducing pricing delta between these two variants.

Commercial vehicle volumes are likely to grow 8%-12% year-on-year in FY24, mainly supported by medium and heavy commercial vehicles, aided by an uptick in economic activities and increased infrastructure spending.

Exports could remain subdued in FY24, especially in the first half, mainly on account of the import ban and restrictions implemented in some Asian as well as African countries, the ratings agency says. Macro-economic headwinds and weakened currencies in some export geographies making imported vehicles costlier would continue to be negative for the overall demand, it adds.

Industry revenues increase could be in the range of 15%-16% year-on-year in FY24, supported by the volume growth as well as price hikes by original equipment manufacturers, says Ind-Ra.

EBITDA margins are also likely to improve by 100-200 basis points in FY24 on account of better operating leverage, low input prices and price hikes.

"Capex in FY24 is likely to be towards new products/technologies, electric vehicle platform, and regulatory changes which could increase the debt levels of certain players. Moreover, higher utilisation especially in the passenger vehicle industry could entail capex towards incremental capacities by some large original equipment manufacturers. While the agency has not factored in the Production-linked Incentive scheme related capex, the refinancing risk is low for the industry and there is adequate rating headroom," says Ind-Ra.

Meanwhile, the ratings agency revised the outlook for the auto ancillary sector to neutral from deteriorating for FY24 on account of easing commodity prices, improving working capital position on a yearly basis, a continued uptick in the domestic demand from original equipment manufacturers and a steady demand from replacement markets. The agency continues to be cautious for export-oriented entities, which primarily are supplying to the replacement markets as well as those with higher overall exposure to Europe which could be more subdued than other geographies.

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