Boston, MA -- (SBWIRE) -- 03/27/2014 -- According to the Society of Indian Automobile Manufacturers (SIAM), Indian auto sales for December 2013 came in at 232,918 units, a decline of 12.9% y-o-y. Looking at recent trends, our full FY2013/14 (April-March) sales growth forecasts may be a tad optimistic and we are therefore downgrading them slightly. We now forecast auto sales for the full fiscal year to contract 6.7%, to 3.2mn units, from a 4.6% contraction previously.

There is a high degree of uncertainty over the outcome of the Indian general elections, with no party currently standing out as being able to form a majority. While this has already been one of the reasons businesses are adopting a wait and see approach in the past few quarters (which has slowed investment activity), consumer sentiment will also remain downbeat in the run-up to the elections as buyers decide to defer their purchases, further clouding an already depressed market.

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A dominant theme for 2014 could be the comeback of petrol car models. Diesel vehicles, which have been popular in the past few years, have seen their share of new sales decline from 58% in the first eight months of FY2012/13 to 54% in the first eight months of FY2013/14. As diesel become more expensive (with pump prices rising every month as the government seeks to reduce subsidies), its cost advantage over petrol is eroded resulting in petrol models becoming more attractive (due to their cheaper sticker price).

CV Sales Remain The Weakest Link

The commercial vehicle (CV) segment, with its rapidly deteriorating fundamentals, remains the weakest link in the Indian auto sector. The high debt levels of infrastructure firms have pushed corporates in that sector into deleveraging mode. As infrastructure companies sell assets to pare down debt, it is only logical that their defensive stance will translate into a significant decline in demand for CVs. Therefore, headwinds in the CV segment are unlikely to abate anytime soon.

We have downgraded our FY2014/15 CV sales growth forecast from 6.0% to 4.5%.

Rural Consumers Will Continue To Drive Two Wheeler Sales

The strength in Indian two-wheeler sales plays out our view that the segment will remain a bright spot amid the broader slump in the auto industry. The sustained outperformance of the scooter sub-segment has prompted us to upgrade our FY2013/14 two-wheeler sales growth forecast from 3.5% to 4.7%.

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