Jan 24, 2006|
Auto: Is it different?
In capital markets, it is said that the four most dangerous words are 'It's different this time'. History itself is evident to the fact that there have been instances in the past when this theory has been proved wrong and more often than not, it is the retail investors who bear the brunt of the same.
Today, when capital markets are at their all time high, the so-called experts have again started feeling that this time the scenario is different. Auto is one sector that the 'experts' find favour. In this article, we shall analyse whether the Indian automobile industry has undergone any fundamental change.
Maturing market: Over the last five years, Indian automobile market has witnessed transition. Today, the Indian players have become more proactive to the needs of the consumers as against being reactive during the late 1990s. For instance, during 1990, Baja Auto said 'I do not need any marketing and distribution, as I have a long waiting list' (for some of its products, the waiting list ran into more than 2 years). However, today, Bajaj Auto is amongst the more proactive players in the automobile space. This has been largely due to the entry of global players and more importantly, Indian auto majors in general have learned from the previous downturn. To give an instance, from a near monopoly in the 1990, Maruti has to fight hard to retain its market leadership these days. Apart from this, the Indian players have also developed the necessary technical skill to compete in the global arena. Secondly, today the Indian consumer is looking for higher end products (ranging around Rs 0.5 m) as compared the entry-level options (segment A).
Size - Volumes matter: Over the last decade, the Indian automobile players have grown in size (see adjacent table). This performance has been aided by the growth in the Indian economy. Compared to around 500,000 to 600,000 in 2000, annual passenger car sales has crossed 1 m mark. Not only have volumes grown, the striking feature has been that this time, companies have significantly improved their efficiency and productivity. It is this size that provides some cushion about the ability of the domestic players to withstand a downturn or a bad patch in an efficient manner. That said, the auto sector is cyclical in nature and the impact of the same can be at varying degree on companies (depending on individual strengths and weaknesses).
Financial snapshot (9 companies)
Increasing focus on R&D: Today, all the Indian automobile manufacturers are increasingly focusing on R&D to improve their quality of the product. Ten years back, most of the Indian players used to enter into a technical development agreement with the global players, whereby the Indian players undertook only the assembling and manufacturing part of the entire product development lifecycle. Globally, the key to retain market share depends on the ability to invest consistently and successfully in R&D. While the Indian players did struggle initially (as is the case with any new R&D setup), a persistent effort over last five years has enabled them to emerge successfully. The rapid introduction of new models in last two years by the domestic majors is the vindication of the fact. Having said that, when compare to global standards, the investment in R&D is not significant. In our opinion, going forward, only those companies will be able to outperform the industry who have the ability and the desire to continue the R&D efforts and improve on their success rate. This is of significance considering the fact that there could be changes in regulatory environment as far as safety and environmental issues are concerned.
Confidence to enter the international markets: Another striking feature of the domestic automobile manufacturers is the confidence that the management has to enter and achieve success in the international market. Almost all the Indian manufacturers are either setting a greenfield projects or entering into tie-ups with the local players in the international markets across the globe. This new confidence is the outcome of the combination of all the above-mentioned factors like size, harnessing skill set and competence.
Based on these parameters, we do feel that the Indian automobile sector has undergone a significant change. However, one should also remember that the automobile sector is cyclical in nature and a steady performance of the economy has contributed to the growth of the automobile sales, apart from lower interest rates. Having said that, we feel that the Indian players have learnt from their past mistakes and used the recent upturn in the economy to their advantage to build in adequate insulations against the potential downturn. To that extent, things are different for the automobile sector. As far as valuations are concerned, we strongly believe that at current juncture, most of the positives have already been factored in the stock prices of a majority of the automobile stocks.
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