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Infrastructure to unlock future potential - Views on News from Equitymaster
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  • Oct 14, 2000

    Infrastructure to unlock future potential

    The automobile sector has no reasons to smile. All segments of the sector, besides motorcycles are facing a slowdown in the current financial year. This is due to a slump in demand across all segments: industry, agriculture and trade. Freight activity is much lower as a result. The freight rates have been recently revised up by 10-15 percent, as a result of the diesel price hike. This however will not act as an incentive for fleet operators to expand their fleets as overall demand is languishing and they are already faced with excess capacity.

    The Centre for Monitoring Indian Economy (CMIE) and the Reserve Bank of India (RBI) have recently revised their economic forecasts downwards for the current financial year. The agricultural sector is expected to have a second consecutive year of poor crop produce due to uneven distribution of the monsoons. The index of industrial production too has slackened over the past couple of months. Hence the demand prospects for the sector are expected to remain dull in the second half of the current financial year.

    (No. of units sold) FY2000 FY99 % change
    Passenger cars 639,000 410,000 55.90%
    Multi-utility vehicles 123,000 111,000 10.80%
    Commercial vehicles 171,000 139,000 23.00%
    Motorcycles 1,796,000 1,395,000 28.70%
    Mopeds 726,000 682,000 6.50%
    Scooters 1,253,000 1,325,000 -5.40%
    Besides the above demand side concerns, the automobile industry will be faced with higher competition post April 2001. Under WTO regulations, imports will be permitted at much lower import duties. This would act as a threat to domestic automobile manufacturers as world class cars would now be available at cheaper prices in India.

    Commercial vehicle (CV) sales in the current year have slowed down considerably. For the first five months medium and heavy vehicle volumes fell by 13 percent year on year (YoY). The impact of higher sales tax on vehicles affected the margins of fleet operators. There are no signs of an improvement in the heavy commercial vehicle industry. However demand for light commercial vehicles (LCVs) has fared well and went up 13 percent YoY during this period. This can be attributed to higher demand from the metro cities as trucks are not permitted during business hours.

    April - August 00 CV volumes % change YoY
    M & HCVs
    Telco 19,174 -15.0%
    Ashok Leyland 10,722 -9.0%
    Hind. Motors 52 8.3%
    Total 29,948 -12.7%
    Telco 14,710 13.0%
    M & M 2,831 14.0%
    Eicher Motors 2,779 29.6%
    Swaraj Mazda 1,757 36.9%
    Bajaj Tempo 1,273 -27.8%
    Ashok Leyland 161 109.0%
    Total 23,511 13.3%
    In the utility vehicles (UV) segment all but two players saw a decline in volumes for the period April - August 2000. The two exceptions were Toyota's Qualis and Telco's Sumo variants. The urban utility market has expanded since the launch of the Toyota Qualis as many car users have turned buyers. For the first five months UV volumes grew by 8 percent.

    In the current year, the passenger car market too has reported a slowdown, and sales have been stagnant over the past couple of months. The mid sized segment did better in the past few months, with Ford and General Motors leading the pack. However at the premium end, companies continued to face difficulties in increasing their volumes.

    Price hikes in the car segment cannot be ruled out in financial year 2001 as companies are likely to incur significant costs to make their products compliant with emission norms. Infact, many companies have already announced price hikes in the passenger car segment to counter the increase in costs. Besides, the depreciation in the rupee too has added to higher import bills for many of the multi-national car companies. Hence they do not have much choice.

    In the two wheeler industry, scooters continued to face a decline in volumes while motorcycles enjoyed buoyant growth. For the first five months scooters declined by 16 percent, motorcycles grew by 28 percent and mopeds grew by 7 percent. The consumer preferences of motorcycles over scooters continues due to the fact that the rural economy has done very well in the past few years. As the monsoons have been deficit in certain states, incremental rural incomes would be affected for the next year. Hence it is likely that growth rates could dip for the motorcycle industry in financial year 2002.

    Two wheeler market share swaying towards motorcycles
    (%) FY94 FY95 FY96 FY97 FY98 FY99 FY00
    Scooters 47 47 46 44 42 39 33
    Motorcycles 27 30 30 33 37 41 48
    Mopeds 26 24 24 23 21 20 19

    However the future outlook for the automobile sector is not that bleak, keeping in mind that it is a cyclical industry with its ups and downs. Taking a more positive view the automobile sector will benefit from infrastructure development in the country. Growth in infrastructure holds the key to unlock the potential of India's CV segment. If efforts are made seriously towards building of roadways and ports, the long term prospects for this sector definitely look bright. Infrastructure development will lead to an increase in the level of business activities as access to even remote places will be easier.



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