Four-wheelers: 2QFY05, the segmental story - Views on News from Equitymaster

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Four-wheelers: 2QFY05, the segmental story

Nov 17, 2004

While almost all the four-wheeler companies experienced inflationary pressures on their bottomlines during 2QFY05, volume sales continued to experience buoyancy. In this article, let us see how the different segments of the industry performed on the volumes front during 2QFY05 for the companies under our universe.

Four-wheelers: In top gear...
Cars2QFY042QFY05% change
Tata Motors291023751128.9%
Maruti9765811757120.4%
TOTAL 126,760 155,082 22.3%
UVs
Tata Motors77557652-1.3%
M&M215282687724.8%
TOTAL 29,283 34,529 17.9%
CVs (M/HCVs+LCVs)
Tata Motors374114406817.8%
M&M 1,642 2,239 36.4%
Ashok Leyland 12,018 12,481 3.9%
TOTAL 51,071 58,788 15.1%

Cars: Spurred by lowest interest rates in three decades and robust economic growth, car companies in our research universe have managed to increase volumes by 22% as compared to same quarter last year. After growing by nearly 30% during FY04, this is the second straight year of double-digit growth rate in the industry, brought about mainly by fiscal incentives from the government as well as a benign interest rate regime. The fact that the economy managed to grow by a record 8% during FY04 and 7% during 1QFY05 also helped in propelling the growth in volumes.

The buoyancy also rubbed off on UV sales, which managed to grow by 18% YoY in the quarter under consideration. While Tata Motors witnessed a marginal drop, a robust 25% growth by the segment leader M&M ensured that the volumes kept ticking. Scorpio, the SUV with an urban appeal, has been the growth driver for quite some time now and the trend continued during 2QFY05 as well.

Going forward, we expect the passenger car industry to grow in the region of 7%-8% in the medium to long-term. This optimism is borne out of two simple facts. One, the country has one of the lowest motor penetration levels in the world (9 per 1000) and secondly at a per capita income of around US$ 5000 on a PPP basis, our middle class comprising of around 200 m people is one of the biggest in the world. According to estimates, this income level is fairly adequate for people to go ahead with ownership of vehicles. Thus, we believe that the basic ingredients are in place to ensure rapid motorization in the country.

CVs: With nearly 70% of the freight in the country now moving by road and interest rates at their lowest in three decades, it was anticipated that the CV industry would live life in the fast lane. If the industry figures are any indication, then it has done little to disappoint. After growing by nearly 30% in the two years leading up to FY04, the robust growth has continued this year also with the leading players recording a growth of nearly 15% YoY during the quarter. However, to expect a similar growth over the medium to long term would be wrong, as the industry follows a cyclical pattern and hence sales are bound to slow down. But with economic growth and spending on new projects showing little signs of slowing, sales are unlikely to hit lows of FY98 and FY01 and growth in the region of 7%-8% is likely to be maintained over the long term.

Having looked at the performance of the major segments of four wheelers during 2QFY05 as well as future prospects, one believes that industry volumes are likely to be buoyant in the coming years. Although there might be some short-term blips, over a longer-term horizon, the picture does seem rosy. But not all companies are likely to benefit from the strong growth that lies ahead. With product lifecycles shrinking and capital spending on the rise, onus should be on companies, which are able to generate strong cash flows from its operations through operational excellence (productivity, cost) and product leadership (product and segment innovation).

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