Automobiles Sector Analysis Report 

• The Indian automobile market 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 have changed, especially on the passenger cars front as many foreign majors have entered 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.

top ↑

• A total of 16.9 m two-wheelers were sold in FY14, a growth of a tepid 7% over the previous year. The slow growth was on account of the overall slowdown in the Indian economy and firm interest rates and fuel prices that dampened demand. Motorcycles accounted for 74% of the total two wheelers sold and grew by a mere 4% YoY. The scooters (geared & ungeared) segment was the star of the two wheeler industry logging in a growth rate of 22% YoY. In the domestic market, the 3-wheeler segment did badly as volumes were down 11% YoY, but the exports growth was strong at 17% YoY.
• It was a second consecutive challenging year for the medium and heavy commercial vehicles (M/HCVs) segment as volumes plunged by 25% during the fiscal given the sluggishness in industrial activity and low freight rates. LCVs were at the receiving end as well as volumes dropped by 17.6% YoY. As a result, volumes for the overall CV industry fell by 20% YoY. The HCV industry is highly cyclical and because the industrial and construction sectors slowed down, its effect was felt on HCVs as well. Both Tata Motors and Ashok Leyland faced heavy challenges during the year given that both of them corner a significant chunk of the CV pie.
• Tractors did very well during the year as monsoons in 2013 were quite healthy and M&M, which is a market leader in the tractors space, benefitted from this as its auto division faced rough weather.
• Passenger vehicles (PV) also did badly as volumes declined by 6%. Slowdown in the economy, firm interest rates and fuel prices had an adverse impact on demand. This time the decline was seen across the segments of the PV space viz., passenger cars, utility vehicles (UVs) and vans. Maruti Suzuki, which is the market leader in the PV space, was not spared either and saw its volumes fall.
• As volumes took a beating, few of the companies did manage to report an improvement in operating margins largely on account of various cost rationalization measures undertaken.

top ↑

• Given that the Modi government has now come into power, there are expectations of increased focus on reforms and ramp up in infrastructure. Thus, 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 both in passenger cars and utility vehicles (UVs) given that the competition has intensified. Since diesel prices have also been hiked, the differential between petrol and diesel will reduce further and this will play an important bearing on a consumer’s purchasing decision.
• 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. The 3 wheeler industry, where Bajaj Auto is the market leader, is also poised for growth on the back of new permits opening up and increase in exports.
• While good monsoon is a positive for the tractor sector, given the fact that non-farm incomes have continued to climb up, volumes should still hold up well in the longer run 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 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.

top ↑

Related Links for Automobile Sector
Quarterly Results | Sector Quote | Over The Years