The Indian auto sector's easy growth seems to be nearing an end with the costs of ownership rising due to fuel prices, interest rates and product price increases, says a new report by the newly-opened India office of The Royal Bank of Scotland N V.
The report said that two-wheelers are seeing the most profitable growth, while it expects cars and CVs to be threatened by new entrants.
It said that cars should still see high volume growth, but lower profitability. In FY10, cars were among the first sectors to recover from the recession and domestic sales grew 25 per cent for the year.
In FY10, Hyundai and other smaller players gained market share at Maruti's expense. In the March quarter, demand rose ahead of the excise duty hike, leading to a demand-supply mismatch.
However, aggressive product pricing by new compact car entrants, like VW, Ford, Nissan and incumbent Maruti should extend strong volume growth in the industry in FY11, given consumers' higher disposable incomes and good levels of employment.
This, along with the shift down to lower value vehicles in the compact segment is likely to impact the short-term profitability of existing players.