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Outlook on the Indian auto sector - Views on News from Equitymaster

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Outlook on the Indian auto sector

Jan 10, 2008

Whichever way you look at it, rising disposable income, lowering age of first time car users, shorter replacement cycles or above all, lower car penetration, one thing cannot be denied and it is the fact that the Indian passenger car industry will continue to grow at a robust rate in the long term. As per SIAM (Society of Indian Automobile Manufacturers), the domestic passenger car industry is likely to grow at a CAGR of 10% between FY07 and FY10 and we believe that the growth rate arrived at by SIAM will atleast be sustained if not overtaken. Furthermore, the percentage of first time car buyers in India as a percentage of total buyers is a dismal 31% as compared to 81% in China. Also, in India, close to 27 m two-wheelers were sold in the last five years and even if a small percentage of those buyers upgrade to cars, the incremental demand will receive a big boost. On account of all these factors, we believe that a long-term growth rate in higher single or lower double digit is very much within the realms of possibility. The same holds true for both the two-wheeler as well as the commercial vehicles segment. While the latter is a play on India's ever improving road infrastructure and hectic pace of construction activity, on can ride the former story on the back of favorable demographics and higher disposable incomes.

India's domestic passenger car market stands at a little below 1.5 m cars today but is populated by all the major global companies. For companies that haven't tested the waters yet, indications are that most of them will soon jump into the fray sooner or later. Thus, with so many brands already present or on the verge of making their Indian debut, competition in the future is likely to intensify. However, unlike in other developing countries like China, there hasn't been a mad scramble for capacity creation in India and this should keep carmakers with decent volumes profitable. But we would also like to add that the margins that the current market players enjoy might be under pressure, as manufacturers will now have little headroom to increase prices.

On the two wheelers front, the top three players currently lord over the market with more than 90% of the market being shared amongst them. Here, unlike the passenger car industry, there is no major threat from newer players but price wars that were initiated a few years back are likely to continue. Further, with the companies spending ever rising amount of money on new product development and promotion, margins are likely to remain under pressure in this segment as well.

Like the two-wheeler segment, the commercial vehicle industry too has the luxury of consolidation currently. But unlike the two-wheeler segment, the competition here is only going to intensify as frustrated with low growth elsewhere, international majors have started eyeing high growth potential markets like India. However, most of the international players have preferred the JV route and wisely so. The segment currently is going through a structural shift where demand for both high tonnage as well as sub one-ton vehicles is gaining ground. Thus, while the international majors boast mostly of technology suited for high tonnage vehicles, the market for which is currently small, they will have to rely on their Indian partner for low tonnage needs. Plus, there is the added advantage of the Indian partner bringing its local knowledge to the partnership. This segment is likely to witness a lot of action in the coming months, provided interest rates remain attractive. Among all the segments, this is the segment that is most sensitive to interest rates.

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