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Auto: What happened in December? - Views on News from Equitymaster
 
 
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  • Jan 11, 2007

    Auto: What happened in December?

    For industry watchers who were presuming FY07 to be another watershed year in the history of Indian automobiles industry, the month of December would have further reinforced their faith. During the month, two wheelers and four wheelers continued to 'fly off the shelves' and growth was witnessed practically across all the segments. Let us have a look at how the major companies across various segments performed during the month.

    Two-wheelers: Bajaj Auto, India's second largest two-wheeler manufacturer has acquired a reputation of outperforming its rivals as well as the industry on the volumes front. December was no different! Growth of 21% YoY for the month was way ahead of its closest rival Hero Honda who could only manage a growth of 3% YoY. The biggest disappointment however was TVS Motor, where volumes fell 4% YoY during the month, primarily due to a sizeable 15% YoY fall in motorcycles sales. Although details are not available, its premium segment offering, 'Apache' seems to have taken a hit as rivals launched new models in the segment. Its scooterette, 'Scooty' however managed to grow 4% YoY during the month.

    Courtesy a significant outperformance vis--vis the industry, Bajaj Auto's market share in motorcycles rose to 36% and helped further close the gap with Hero Honda, India's largest motorcycle manufacturer. Unless the latter does something quickly, the ground below will continue to slip fast. Again on Bajaj Auto, the company will soon come out with a brand new scooter, based on the DTSI platform (the platform behind its extremely successful 'Pulsar'), which is likely to help it augment further volume growth, as the scooter segment has been a non-performer of late.

    Passenger Vehicles: M&M, India's largest utility vehicle (UV) manufacturer led the growth list in passenger vehicles (PV) as volumes spurted 34% YoY during the month. While 'Scorpio' grew 22% YoY, other UVs witnessed a huge 39% YoY jump in volumes. As far as year-to-date (YTD; April to December 2006) performance is concerned, it is Tata Motors, India's second largest manufacturer of passenger cars that emerges as the top performer in terms of percentage growth in volumes. Armed with 'Indica', that has been 'reinvented' a number of times and a restyled and repositioned UV portfolio, the company has reported a 23% YoY jump in PV volumes for the year so far. For December, the volumes were slightly better at 27% YoY, thanks mainly to a 30% YoY jump in 'Indica' volumes. While Maruti, India's largest passenger car manufacturer by a long shot may not have led any of the list, its growth numbers would not have saddened anyone. Led by a scorching 36% YoY growth in its A-2 segment offerings, a 26% YoY growth in overall volumes for the month came in a tad below Tata Motor's. Its MUVs (multi-utility vehicle) also flied quickly off the shelves and grew at an impressive 41% YoY during the month. Its overall YTD growth however was a relatively muted at 18% YoY, although the December numbers did prop it up a bit.

    The company has stated that it is planning to launch a new SUV (sports utility vehicle), between 'Gypsy' and 'Vitara' and will try and fill the only gap in its otherwise rich portfolio. In the A-2 segment, it has kept the consumer interest in its old warhorse 'Zen' alive by launching a new version called 'Estilo'. However, it would be too premature to say what impact it will have on its sales numbers going forward.

    Commercial Vehicles: Although M&M once again tops the list here, due to its insignificant numbers as compared to the big two, Tata Motors and Ashok Leyland, let us keep it out of the discussion for the time being. While industry watchers seem to be expecting a slowdown in CV sales, we reckon they will have to wait for another month as December numbers for CVs were once again mind numbing. Led by a huge 56% YoY growth in M&HCVs (medium & heavy commercial vehicles), Tata Motors' CV volumes jumped a huge 50% YoY during the month. Ashok Leyland was not far behind as volumes improved 48% YoY during December 2006. With industrial activity on an upswing, operators seem to be awash with cash and are opting to replace their ageing fleet. Further, the Supreme Court ban on truck overloading also seems to be playing its part in helping the industry notch up record growth numbers. The industry is in its fifth year of expansion and a slowdown cannot be ruled out. Further, with lot of foreign players vying to grab a pie of this fast growing market, volume growth might come under further pressure for existing players.

    Conclusion
    As mentioned earlier, FY07 is on course to become another watershed year for the Indian automobile industry in general and four wheelers in particular. However, volume growth does not always translate into bottomline growth and investors need to exercise caution to that extent. Already, input costs seem to be putting pressure on margins and as more and more players throw their hats into the ring, these (margins) are likely to come under further pressure. Amidst this euphoria, look out for companies that are not being blinded by growth and are being rational in their capital expenditure plans. If anything, the incremental returns are not going to be like anything in the past and hence tone down your expectations to that extent.

     

     

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