Automobiles Sector Analysis Report 

• 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.
• 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).
• 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.
• 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.
• 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.

• 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.
• 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 9.4 m two-wheelers were sold in India in FY10, a growth of a strong 27% over the previous year. Motorcycles accounted for 78% of the total two wheelers sold. Although economic growth came in much below than 9%, low interest rate, availability of credit and a low based effect helped two wheeler sales to grow strongly. 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 26% YoY, led by 31% growth in passenger carriers. The goods segment on the other hand grew more than 11%.
• The medium and heavy commercial vehicles (M/HCVs) segment saw its volumes grow by a huge 34%. This came on the back of 37% drop in volumes in the previous year, the industry's second in eight years. High cost of borrowings and economic slowdown affected growth in FY09, the reversal of these factors helped growth in FY10. LCVs on the other hand, outperformed their HCV peers as volumes increased at an even better rate of 43%. The growth in the segment was largely propelled by low tonnage vehicles of the likes of 'Ace', the sub one tonner from Tata Motors and a couple of similar launches by competition.
• The tractor industry, the world's largest also logged in impressive growth in FY10. Domestic volumes grew by 32% as against a marginal growth in the previous year. After suffering a marginal decline in FY09, sales of passenger vehicles increased by 26% in FY10, primarily due to availability of finance and low interest rates. Utility Vehicles also logged in a strong growth of 21% in FY10.

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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.
• 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 Honda are poised to benefit from higher demand for ungeared scooters in the urban and rural markets.
• Riding the wave of structural changes taking place in the country, the tractor industry has registered good growth in FY10 despite sub-par monsoons. However, while fiscal FY09 saw volumes grow marginally, the same roared back in FY10, witnessing a growth of 32%. 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.
• With an estimated 40% of CVs plying on the roads 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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Related Links for Automobile Sector
Quarterly Results | Sector Quote | Over The Years