India's autos sector achieved record growth of 31% year-on-year (y-o-y) in calendar year 2010, with car sales reaching 1.87mn units, compared with 1.43mn units in 2009, when sales fell dramatically during the financial crisis.

The Society of Indian Automobile Manufacturers (SIAM) reported that improved access to credit and rising demand from rural areas contributed to the record growth. The rural market will be a high-growth opportunity for carmakers over the forecast period, as rising incomes boost spending.

One of the key factors in the market's growth in the previous financial year could serve as a threat in the current year. Rising interest rates will threaten the credit-fuelled boom in sales. This is already playing out in the first half of the year ending March 2012.

We have pointed out that one of the key factors in the market's growth in the previous financial year could serve as a threat in the current year. Rising interest rates will threaten the credit-fuelled boom in sales of previous years. This is already playing out in the first half of the year ending March 2012.

Carmakers in India were mostly taken by surprise at the Reserve Bank of India (RBI)'s decision on September 16 2011 to hike interest rates for the 12th time since March 2010. Coupled with another increase in petrol prices just the day before, the outlook for vehicle sales is worsening, despite the presence of Diwali in October, which traditionally spurs sales.

Over the April to September 2011 period, passenger car sales were up just 1.84%, compared with the double-digit growth of the commercial vehicle segment. Rising ownership costs come at a time when consumers are grappling with stubborn inflation (of over 10% y-o-y in September 2011) and falling asset prices and is unlikely to boost consumer spending going forward. We have accordingly downgraded our FY2011-12 sales forecast to 2% growth. Some damage to market performance so far this year also came from the disruption to vehicle supplies as a result of the ongoing strikes at Maruti's plant in Manesar. The favourable base effect and the most likely resolution of the labour dispute should help sales reach 9% growth in the following year, ending March 2013.

Sustained subsidies on diesel prices are perhaps a factor in the ongoing outperformance of the commercial vehicle segment in the first half of FY11. The commercial vehicle segment growing 18% in September and 17.85% in April to September, compared with the passenger vehicle segment's marginal growth of 1.43% in September and 1.84% over the six months. This is still in line with our forecast for 15% growth in commercial vehicle sales for the year ending March 2012, which has prompted significant investment in the segment.

While India has been developing into a global production and export hub for manufacturers of small cars in recent years, Sweden's Volvo Buses intends to build on the country's booming commercial vehicle segment to expand its local unit into an export hub. Volvo Buses India has announced plans to invest INR4bn (US$81mn) over a five-year period to expand its capacity, develop new products and build up its export operations. Volvo's strategy is to use growing markets such as Asia and Latin America to offset projected weakness

Full Report Details: India Autos Report Q1 2012