Scrappage Policy - Growing Vehicle Population on Indian Roads

Special Report by HDFC Securities

As a part of Automotive Mission Plan (2006-2016), industry has demanded retirement of old vehicles, of more than 15 years of age, by providing incentives and concessions for replacement. This will not only benefit the industry with more sales and faster turnaround, but will also help in reducing the air pollution and congestion levels - problems associated with the older vehicle population on road. The report divided in 4 sections highlights the impact of scrappage policy on the sector dynamics and companies. Section 1 covered in this issue dwells on Scrappage Policy and growing vehicle population.

Growing vehicle population on Indian roads

India today has over 102 million registered vehicles on road - with the two-wheeler segment forming close to 73% and passenger vehicles 14% of the total vehicle population. The auto sales have grown at a CAGR of 11% since 2002.

 
 
 
This growth has also brought with it the issues like traffic congestion and pollution. Close to one-third of this vehicle population is more than 10 years old and over one-fifth is over 15 years old, leading to 1) higher emission, 2) lower fuel efficiency, and 3) insufficient safety parameters.

In spite of the newer vehicles being more fuel efficient and environmental friendly, vehicle pollution & traffic congestion remain the major nuisances considering large number of old and poorly maintained vehicles on road.

As per the Automotive Mission Plan (AMP), the industry has recommended scrappage policy for vehicles over 15 years of age - to fasten the pace of replacement. We expect this to lead to a replacement demand of over 20% of current vehicle population on road with age more than 15 years.

There are over 20 mn vehicles with age more than 15 years on Indian roads with two-wheelers forming the biggest share (14 mn) followed by Passenger Vehicles (2.5 mn). Close to 20% of registered vehicles as on 2010 is more than 15 years old (registered on or before 1996). Last 10 years have seen lot of technical improvements in the newer vehicle models and implementation of stricter emission norms (BSII and recently BSIII & BSIV) - leading to lower pollution levels.

 
But, it is this sizeable chunk of older population that has mitigated the potential positive impact of the technological updates. As per CSE, emission of CO2 on Indian roads is expected to reach a value of 1,212 mn tons during 2035 from a value of 208 mn tons during 2005. Delhi alone accounts for 12% of India's total PV population - more than Chennai, Hyderabad and Mumbai clubbed together.

 
Over one-third of commercial vehicles (Goods as well as passenger), are past their product life but still active on the roads. These not only add to the pollution but also pose security hazards considering their regular breakdowns on road.

We expect introduction of scrappage policy to lead to a strong replacement demand for CVs and passenger cars older than 15 years - comprising almost 20% of the respective population.

Indian Auto Industry - Strengthening its position in the world

 
Indian auto industry is the second fastest growing in the world after China. From being 15th in the world for passenger vehicle production in 1999, India has moved up as the 7th largest with 2.6 mn units in 2009.

 
 
 
 
Growth in passenger vehicle sales

With an 11% CAGR growth in last 8 years, the car park on Indian road has increased multifold from 3 mn in FY1991 to 14 mn by FY10. The production of cars has grown at a CAGR of 20% from 1994 to 2010.

The industry is further forecasted to grow at a CAGR of 13-15% for next 5 years. Going forward, we expect the growth momentum to remain driven by the overall economic growth, rising rural incomes and increasing penetration. India's per capita income is projected to grow at a CAGR of 12.7% for next 5 years.

 
 
 
Growth in two-wheeler sales

Two-wheelers, forming close to two-thirds of total vehicle population have seen a jump from 14 mn in FY1991 to 76 mn in FY'10, an increase of over five folds. Motorcycle sales in India have grown at a healthy 18% CAGR in the past decade and we remain positive on the future outlook as well.

While sales were hit during the global financial meltdown (-12.6% in FY08 and +1.2% in FY09), FY10 sales rebounded strongly and H1 FY11 growth at 22.5% has been robust as well. We expect two-wheeler segment volumes to grow at a healthy CAGR of 15% over FY10-13.

 
 
CV Sales Growth

CV sales in India witnessed a spurt of growth after the drop in 2008-09. We maintain our positive outlook towards commercial vehicle segment led by -1) GDP growth projections, and 2) higher infrastructure spending - 9% of GDP by 2014.

 
 
We expect the Heavy Duty truck segment to drive the growth, while the Light and Medium Duty truck segment should consolidate further. Outlook for bus segment remains positive as well given recent pick-up in orders by State Transport Units and improving road infrastructure.

Low vehicle penetration in India

Though the total vehicle population in India has increased from0.3mnin 1951 to close to 102 mn by 2010, penetration of auto vehicles in India is still at a lower end.

As per our estimates, the two-wheeler penetration in India is close to 64.6 per thousand and passenger vehicle penetration is 12.1 per thousand. This is quite low as compared to over 500 cars per thousand in the developed markets.

 
We believe, low penetration as compared to developed nations coupled with growing income and purchasing power will be the key drivers for auto sales growth, driving the sales with a CAGR of 13-15% for the next 5 years. Increasing penetration will further increase the load on the already congested Indian road infrastructure.