PV Volume to Cross 5 Million Units in FY26; EV Growth Slow This fiscal year, utility vehicles (UVs) will drive volume growth, aided by new launches, easing interest rates, rising compressed natural gas (CNG) adoption, and rural tailwinds.

Even as the annual growth rate slows to 2-4 per cent, India's passenger vehicle (PV) industry is set to reach a new high this fiscal year, with domestic and export volume cumulatively crossing 5 million units.

According to a Crisil report, this marks the fourth consecutive year of record sales, although momentum has significantly eased from the 25 per cent surge in fiscal 2023 after the pandemic.

This fiscal year, utility vehicles (UVs) will drive volume growth, aided by new launches, easing interest rates, rising compressed natural gas (CNG) adoption, and rural tailwinds. That said, gains will be capped by weak adoption of electric vehicles (EVs) and sluggish sales of entry-level cars and sedans, the Crisil report stated.

As volume growth slows, original equipment manufacturers (OEMs) will rely on premiumisation and better product mix to protect margins. "Softer input costs, better utilisation, and price hikes are likely to partly offset rising regulatory compliance costs, which will help maintain the operating margin for the industry at 12-12.5 per cent this fiscal," the report noted.

Healthy cash flows and robust cash surplus will enable OEMs to fund their high capex comfortably, while keeping their balance sheets and credit profiles strong and stable.

The domestic market accounted for 85 per cent of total volume last fiscal, with exports accounting for the rest, said Anuj Sethi, Senior Director, Crisil Ratings. He added, "PV growth will moderate to 2-4 per cent this fiscal, but UVs will continue to cruise with 10 per cent growth, supported by new launches. With UVs contributing 68-70 per cent of volumes and the bulk of upcoming models, the shift toward premiumisation is structural. Rural recovery, expected from likely above-normal monsoon and reduction in interest rates, should improve demand for entry-level cars."

Fuel mix is also evolving rapidly. CNG-powered PVs are gathering pace, with their share likely reaching 15 per cent this fiscal owing to low running costs and a fast-expanding network of over 7,000 refuelling stations.

Meanwhile, growth in electric vehicles (EVs) has slowed after doubling last year, but on a low base. Despite a flurry of launches and declining battery costs, penetration is moderate at 3-3.5 per cent, weighed down by high prices, modest charging infrastructure, and range anxiety, restricting the market to urban users as a second car option, the report noted.

"The majority of EV users currently rely on home charging, which isn't a viable solution for many urban residents who lack access to dedicated parking spaces. This limitation, coupled with range anxiety, continues to hinder widespread EV adoption. For commercial EV fleets, the stakes are even higher—high uptime is critical to ensure timely deliveries, reduce vehicle idle time, and optimize fleet efficiency and utilization. Likewise, the growing use of Electric Transport Services (ETS) for employee commutes demands a reliable and accessible charging network to maintain punctuality and operational consistency," said Dev Arora, Founder & CEO, Alt Mobility.

Meanwhile, PV export growth is likely to moderate to 5-7 per cent in fiscal 2026, down by a third, amid global headwinds., the report added.

The 25 per cent US tariff, effective June 2025, poses limited risk as the US forms just 1 per cent of total PV volumes. OEMs can pivot to alternative markets such as Mexico, the Gulf countries, South Africa, and East Asia, though ongoing geopolitical tensions could weigh on exports' momentum.

"Despite falling volume growth and stable input prices, OEMs have hiked prices 3-4 per cent to offset the rising cost of technology upgrades and regulatory compliance. This, along with the better-priced UV mix, is expected to keep operating margin steady at 12-12.5 per cent, ensure healthy cash flow from operations, and afford flexibility to address capacity constraints and support new product rollouts," the report noted.

"PV capex is expected to stay elevated at Rs 30,000 crore this fiscal as OEMs ramp up capacity, accelerate EV investments, and push localisation and digital upgrades despite slowing demand growth. However, this high capex remains sustainable, backed by strong internal accruals and cash surplus, with capex-to-Ebitda steady at 0.5x," said Poonam Upadhyay, Director, Crisil Ratings.

The entry of global premium EV models, including Tesla, would intensify competition in the premium segment, which accounts for less than 10 per cent of the overall volume, and will likely reset consumer expectations across categories, pushing Indian OEMs to accelerate technology upgrades. That said, the current high tariffs will limit imports.