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The Indian automobile segment can be divided into several segments viz. two-wheelers (motorcycles, geared and ungeared scooters and mopeds), three wheelers, commercial vehicles (light, medium and heavy), passenger cars, utility vehicles (UVs) and tractors.
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Demand is linked to economic growth and rise in income levels. Per capita penetration at around nine cars per thousand people is among the lowest in the world (including other developing economies like Pakistan in segments like cars).
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While the industry is highly capital intensive in nature in case of four-wheelers, capital intensity is a lot less for two-wheelers. Though three-wheelers and tractors have low barriers to entry in terms of technology, four wheelers is technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers. With the Indian market moving towards complying with global standards, capital expenditure will rise to take into account future safety regulations.
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As compared to their global counterparts, both the two-wheeler as well as four wheeler segments are relatively lesser fragmented. However, things are changing, especially on the passenger cars front as many foreign majors are eyeing the Indian market. As a result, pricing power is likely to diminish going forward.
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Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling an incremental unit comes down. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.
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| Supply |
The Indian automobile market has some amount of excess capacity. |
| Demand |
Largely cyclical in nature and dependent upon economic growth and
per capita income. Seasonality is also a vital factor.
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| Barriers to entry |
High capital costs, technology, distribution network, and availability of auto components. |
| Bargaining power of suppliers |
Low, due to stiff competition. |
| Bargaining power of customers |
Very high, due to availability of options. |
| Competition |
High. Expected to increase even further.. |
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A total of 11.8 m two-wheelers were sold in India in FY11, a growth of a strong 26% over the previous year. Motorcycles accounted for 76% of the total two wheelers sold. The growth came in despite the series of interest rate hikes undertaken by the RBI to bring inflation under control. The scooters (geared & ungeared) improved their sales considerably, largely due to improved performance of the ungeared scooter segment. The 3-wheeler segment also performed well as domestic volumes improved 19% YoY, led by 22% growth in passenger carriers.
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The medium and heavy commercial vehicles (M/HCVs) segment saw its volumes grow by a huge 32% after having grown by an impressive 34% in FY10 as well. LCVs on the other hand, underperformed their HCV peers as volumes increased at a relatively lower rate of 23%. The strong growth in the overall CV segment was due to high growth rates during the first half of the fiscal supported by sustained economic growth and impact of a lower base in the corresponding period last year. Healthy growth in the agricultural and industrial sectors also fuelled demand for CVs.
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The tractor industry, the world’s largest also logged in good growth in FY11. Domestic volumes grew by 20% as against a growth of 32% in the previous year. After increasing by 26% in FY10, sales of passenger cars did well in FY11 as well as volumes grew by 30% YoY. A strong growth in GDP aided by recovery in agriculture and good performance in the industry and services sector had a positive impact on the same of passenger vehicles as well. Utility Vehicles also logged in a strong growth of 19% in FY11.
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While raw material prices softened considerably in FY10 and bolstered operating margins, the scenario reversed in FY11. Although sales growth in FY11 remained strong, auto companies began to feel the pressure on operating margins on the back of rising raw material prices.
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The government spending on infrastructure in roads and airports and higher GDP growth in the future will benefit the auto sector in general. We expect a slew of launches in the Segment 'B' and Segment 'C' of passenger cars. Utility vehicle segment is expected to grow at around 8% to 9% in the long-term.
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In the 2-wheeler segment, motorcycles are expected to witness a flurry of new model launches. Though the market size is expected to grow by 10% to 12%, competitive pressure could keep prices and margins under control. TVS, Honda and Hero Motocorp are poised to benefit from higher demand for ungeared scooters in the urban and rural markets.
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Riding the wave of structural changes taking place in the country, the tractor industry registered good growth in FY10 as well as FY11. However, while fiscal FY09 saw volumes grow marginally, the same roared back in FY10, witnessing a growth of 32%. The strong performance continued in FY11 as well as volumes grew by 20%. While good monsoon is a positive for the sector, given the fact that non-farm incomes have continued to climb up, volumes should still hold up pretty well despite a year or two of poor monsoons. The longer-term picture is impressive in light of poor mechanisation levels in the country’s farm sector and the thrust of the government on improving rural infrastructure.
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With an estimated 40% of CVs plying on the roads being 10 years old, demand for HCVs is expected to grow by 7% to 8% over the long term. While the industry is going through cyclical hiccups currently, we expect this factor to weaken in the future on account of strong structural tailwinds. The privatisation of select state transport undertakings bodes well for the bus segment.
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