Entry-level car buyers postponing purchases as COVID hit income sentiment: Crisil report

Customers aspiring to buy entry-level cars or those looking for an upgrade to such models are postponing decisions as the COVID-19 pandemic had hit their income sentiment significantly, rating agency Crisil said in a report on Monday.

At the same time, sales of premium segment cars were expected to go up on account of resilient incomes of affluent buyers, while the share of higher-priced two-wheelers is likely to remain about 40%, it added.

Cars priced above ₹10 lakh fall in the premium segment while two-wheelers costing ₹70,000 and above come in the higher prices category.

While supply-chain issues have affected a raft of vehicle manufacturers, counter-intuitively, models priced higher than the entry-level ones had continued to find buyers, the agency said.

In India, usually lower-priced cars are bought by first-time users or those upgrading from used vehicles.

Last fiscal, premium segment cars sold five times faster than those with lower sticker prices, and notched up about 38% year-on-year growth compared with about 7% growth for the latter, Crisil said.

Consequently, the market share of premium cars rose 500 basis points to about 30% last fiscal, compared with about 25% in FY21, it said.

Going forward, Crisil said, it expected the share of higher-priced cars to remain at the current level due to resilient incomes of affluent buyers and traction for new models. Also, the share of higher-priced two-wheelers will remain at about 40% on the back of increasing consumer preference and the availability of more models.

The agency noted that there was a stark difference in 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 introductions that had increased the preference for higher-priced cars.

The report also said that estimates suggested the employee cost of large and medium-sized 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.

On top of muted income sentiment, there had been a 15-20% 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 6 emission norms that had been a drag on sales, according to Crisil Research.

Consumer preference had 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 for 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 about 56% of the lower-priced cars sold in fiscal 2019, had been on a decline for three fiscal years now, the agency noted in the report.

It also said there were only 39 models of lower-priced cars available last fiscal compared with 54 in FY16.

Additionally, the lower-priced car segment had little to show with new introductions since fiscal 2020, contributing to only about 15% of the 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 68% of the higher-priced cars sold in fiscal 2019, witnessing a decline in sales since fiscal FY19, Crisil said.

However, the new introductions had outperformed, filing in the gap. Though the number of models available was stable at 53-55, new introductions since fiscal 2020 contributed significantly to the overall sales volume in the segment, it said.

Stating that as many as 19 of these had racked up 32% of volume share within higher-priced cars 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 in excess of ₹70,000 had consistently sold more than those that cost less, owing to factors such as a 40-45% increase in the cost of ownership and a 50-55% 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 6) and price increases 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 focussing more on the higher-priced segments because of changing consumer preference. In fiscal 2015, the lower-priced segment had 29 models whereas currently, 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 agency said.