The auto sector continues to hit the speed breakers. The Society for Indian Automobile Manufacturers (SIAM) has cut FY17 sales forecast for passenger vehicles to 6-8 per cent from 12 per cent projected earlier. SIAM believes the infra cess, higher steel prices and ad hoc government policies are slowing the speed of expansion this year.

Speaking to Bloomberg TV India, Hyundai Motor India’s Senior VP for Marketing and Sales Rakesh Srivastava said the auto industry faces challenge in terms of demand in the entry segment, regulatory hurdles for diesel vehicles and higher cost for higher-end vehicles.

Is SIAM being overly cautious on slower growth in passenger vehicles or is it reflecting the reality on the ground?

When we look at FY16, passenger vehicles sales had increased 7.2 per cent. Manufactures had dispatched volumes of 2.79 million from various locations. The last time the sales rose faster was in FY11, when the growth was almost 28 per cent. So during FY16, we have definitely seen the highest sales growth in the last five years.

But this has come on the strength of new model launches, deep discounts, and the low base of the last couple of years, which were very challenging in terms of volume growth. The initial forecast of SIAM was in the range of around 11-12 per cent and the recent forecast comes around 6-8 per cent, which we believe is still optimistic because the challenges are far severe in the market place.

One, consumer sentiments are on the lower side.

The infrastructure cess that has been imposed in the Budget in the range of 1-4 per cent is a big challenge. In addition to that rural sales have been on the decline and this has also created a challenge.

So what we are seeing is sales are based on deep discounts and new models. But that could face a big challenge again.

You mentioned slack rural demand. How is the demand panning out currently? Where is it coming from? Is it the first time buyers when you talk about the compact segment?

The first-time buyer demand is actually on the lower side. It is basically the customers who are going in for additional vehicles after having owned one vehicle in the family — that is where the demand is on the rise. The entry segment has seen challenges. And largely the entry segment vehicles are bought in the rural markets or in tier III, IV and V cities. So that is the challenge that we are facing.

Where is the demand coming from? Is it the compact sedan segment? Which segment are the buyers mostly interested in?

The entry segment, where the upgrade happens from two-wheelers, is seeing the biggest demand challenges. In addition to that there have recently been the challenges since December after a ban on diesel vehicles on account of environmental issues, as diesel vehicles contributed a good amount of volume for the passenger vehicle sales.

A couple of years ago, around 55 per cent of sales in the auto industry came from diesel vehicles. But now it has reduced to 45 per cent. So we are seeing challenges in terms of volume demand for entry segment, diesel vehicles and towards the higher-end vehicles also because the economy is still in revival mode.

Will the infrastructure cess hurt sentiments in the entry segments?

Definitely. The auto industry is very price sensitive. Largely when we look at the entry segment, it is very price sensitive and any increase in taxes will definitely impact volumes. The auto industry pays the highest taxes. And, it is capital intensive. Despite being capital intensive, today the capacity utilisation is 60 per cent and many of the manufacturers are not making profits. So there will be serious challenges towards gaining volumes and capacity utilisation.

How are the global markets looking like for Hyundai?

Exports are facing challenges. The world economy as a whole and various regions — Russia, China, Latin America and Middle-East — are facing challenges. When demand in the overseas market is on the decline, then it becomes a big challenge for auto industry as export is part of the business strategy. That’s why we are witnessing low capacity utilisation. So the outlook for exports is of a cautious optimism this year.

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