Tough road ahead for India carmakers as boom market crashes

India's annual car sales fell for the first time in a decade in the financial year just ended and are expected to post subdued growth this year, calling into question bullish expectations that fuelled billion-dollar bets from global manufacturers.

Carmakers in India, two years ago the world's hottest growth market after China, have seen high interest rates, rising fuel prices and prolonged economic gloom turn an industry recently growing at 30 percent a year into one plagued by huge discounts, showrooms full of unsold cars, and chronic overcapacity.

Quitting India is not an option for global majors such as Ford Motor Co and Volkswagen AG , given its huge population, rising incomes and long-term potential.

But manufacturers that have sunk huge amounts of cash into the country are likely to pare back expansion plans as economic troubles persist, and the industry braces for another year of disappointing sales.

"The industry, like the rest of the economy, has slowed down very substantially," R.C. Bhargava, chairman of market leader Maruti Suzuki , told Reuters.

While surging sales of SUVs have been a bright spot for some manufacturers, sales of the smaller cars that account for most of the passenger vehicle market have crashed this year.

"Everything has slowed down by two to three years," Bhargava said. "Everybody has to consolidate their operations, look how to manage with less, do more with less ... This recessionary period will force people to be more efficient."

Car sales in the financial year that ended March 31 fell an annual 6.7 percent, according to data from the Society of Indian Automobile Manufacturers (SIAM) released on Wednesday, after sales in March fell an annual 22.5 percent.

The drop is the worst since the financial year that ended in 2001, when sales fell 7.7 percent, according to SIAM. Last year, India's car sales grew 2.2 percent.

The immediate future looks mostly gloomy for an industry that experts had expected to ring up annual car sales of 9 million by 2020 from a current 1.9 million, but looks set to significantly undershoot that target.

"I don't think those goals are going to happen in that timeframe," said Bhargava. "Conditions have changed a lot"

Car sales are likely to grow by 3-5 percent in the financial year that began on April 1, SIAM said. SIAM initially estimated 10-12 percent growth for the last financial year, but was forced to slash that forecast three times in the face of actual sales figures.

The market will continue to remain weak, executives said, until a substantial cut in interest rates and sustained improvement in the country's economic growth, which in the last financial year fell to its lowest in a decade.

"In the absence of any positive stimulus and sentiments ... We foresee the pressure on volumes to continue until there is significant improvement in macro-economic factors," said Rakesh Srivastava, senior vice president of Hyundai Motor Co's <005380.KS> Indian unit, which like Maruti specializes in small cars.

Hyundai, India's No. 2 carmaker, has weathered the storm better than others, registering flat growth. Global rivals such as General Motors Co , Ford, Toyota Motor Corp <7203.T> and Volkswagen have seen already underwhelming sales volumes fall by as much as 20 percent.

CAPACITY GLUT

In 2011, when sales were rising 30 percent a year, Ford and Maruti wrote cheques for around $1 billion each to build plants in the western state of Gujarat.

Last month, Tata Motors Ltd's factory in Gujarat, built solely to manufacture its much-vaunted low-cost Nano, cranked out just 1,282 cars, a miserly 6 percent of total possible capacity at the 250,000 cars a year plant.

Tata has been India's worst-performing major carmaker this year, with car sales plunging almost 30 percent, but its capacity utilization woes are mirrored across the industry, where a race to ramp up in recent years has created a glut.

India's total passenger vehicle production capacity stands at around 4.9 million, meaning the average industry utilization level stands at around 55 percent. Total capacity is slated to hit 5.5 million by the end of 2015.

"I suspect everybody will re-evaluate the time when they need new capacity," said Bhargava, adding that his company, controlled by Japan's Suzuki Motor Corp <7269.T>, would likely open its new plant in Gujarat in late 2015, later than planned.

India's automobile sector stocks have fallen 15.4 percent so far this year, the steepest drop among global peers, while over the last 60 days, analysts have slashed their forward 12-month earnings per share estimates on the sector by 4.2 percent, the harshest in the Asia-Pacific region.

The only bright spot has been a surge in demand for sport utility vehicles (SUVs). Sales of off-road and crossover models grew by over 50 percent over the past 12 months, providing incremental growth for some manufacturers.

Mahindra and Mahindra Ltd , a domestic SUV specialist, grew its passenger vehicle sales by 27 percent in the last fiscal year, while Renault SA sold almost 40,000 of its budget SUV Dusters, which it launched in July.

Sales of SUVs and vans are not counted as part of the car data released by SIAM. Including SUVs and vans, overall passenger vehicle sales rose 2.2 percent in the financial year, down from a rise of 4.7 percent in the previous year.

Even SUV sales, helped by cheap diesel, are starting to show signs of slowing growth as the government moves to reduce its subsidy on the fuel, while a recent rise in tax on the vehicles may curb demand.

"Any meaningful growth recovery will likely happen only in FY15E," Macquarie wrote in a recent research report, referring to the financial year that ends in March 2015.

(Additional reporting by Patturaja Murugaboopathy in SINGAPORE; Editing by Tony Munroe and Daniel Magnowski)