Indian Automobiles Industry Report - Automobiles Sector Research & Analysis in India - Equitymaster

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Automobiles Sector Analysis Report 

[Key Points | Financial Year '17 | Prospects | Sector Do's and dont's]

  • The Indian automobile market can be divided into several segments viz., two-wheelers (motorcycles, geared and ungeared scooters and mopeds), three wheelers, commercial vehicles (light, medium and heavy), passenger cars, utility vehicles (UVs) and tractors.
  • Demand is linked to economic growth and rise in income levels. Further, it is inversely related to the interest rates and fuel prices as 85% of the total vehicles are bought on credit. Per capita penetration at around eighteen cars per thousand people is among the lowest in the world (including other developing economies like Pakistan in segments like cars).
  • While the industry is highly capital intensive in nature in case of four-wheelers, capital intensity is a lot less for two-wheelers. Though three-wheelers and tractors have low barriers to entry in terms of technology, four wheelers are technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers. With the Indian market moving towards complying with global standards, capital expenditure will rise to take into account future safety regulations.
  • As compared to their global counterparts, both the two-wheeler as well as four wheeler segments are relatively lesser fragmented. However, things have changed, especially on the passenger cars front as many foreign majors have entered the Indian market. As a result, pricing power is likely to diminish going forward.
  • Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling an incremental unit comes down. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.

How to Research the Automobile Sector (Key Points)

  • Supply
  • The Indian automobile market has some amount of excess capacity.
  • Demand
  • Largely cyclical in nature and dependent upon economic growth and per capita income. Seasonality is also a vital factor.
  • Barriers to entry
  • High capital costs, technology, distribution network, and availability of auto components.
  • Bargaining power of suppliers
  • Low, due to stiff competition.
  • Bargaining power of customers
  • Very high, due to availability of options.
  • Competition
  • High. Expected to increase even further.

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Financial Year '17

  • A total of 19.9 m two-wheelers was sold in FY16, a growth of a 5% over the previous year. While the year started at a good note but the industry headwinds like Demonetization, GST, BS norms led to a slowdown. The hit on profitability was higher than the hit on the volumes because most of the two-wheeler players offloaded their inventory on hefty discounts post the implementation of BS Norms.
  • The worst hit segment due to economic headwinds was the three-wheeler industry. While the exports markets have been lurching from last three years, the domestic market also struggled in FY 17 and overall volumes were down by 17% YoY.
  • After good growth in last year and a decent start to FY17, the medium and heavy commercial vehicles (M/HCVs) (this includes light commercial vehicles) also suffered due to GST, Demonetization and implementation of new BS norms. The volumes for the year grew by 4% and that was because most of the companies in the sector opted for hefty discounts to offload the old BS inventory.
  • One of the only segment that proved to be resilient amid the ongoing uncertainties in the automobile segment in FY17 was Passenger Vehicles (PV). The overall PV segment grew at 11% YoY with passenger cars growing by 6% YoY and utility vehicles growing by 40% YoY. The Indian four-wheeler segment is going through a shift from passenger vehicles to utility vehicles. The industry has seen a flurry of new launches by all the participants in this space.

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  • The current government has been trying to revive the economy and has been very aggressive in terms of infrastructure spending. The spending on constructing roads, airports and expected high GDP growth will benefit auto sector in general. In fact, the lower interest regime also bodes well the for the sector as more than 80% of the vehicles in India are financed.
  • Historically, the Indian Passenger car market has been skewed towards small passenger cars. However, there is a structural change taking place in the industry with demand for UVs taking over the passenger car. This shift is paving a way towards new avenues of the growth and will result in a more profitable growth for the sector.
  • In the 2-wheeler segment, motorcycles are expected to witness a flurry of new model launches. Though the market size is expected to grow by 10% to 12%, competitive pressure could keep prices and margins under control. TVS, Honda and Hero Motocorp will continue to benefit from higher demand for ungeared scooters in the urban and rural markets. In the last four years, scooters have grown at a faster clip than motorcycles and this trend is expected to continue going forward. The 3 wheeler industry, where Bajaj Auto is the market leader, is also poised for growth on the back of new permits and increase in exports.
  • While good monsoon is a positive for the tractor sector, assuming that non-farm incomes climb up, volumes should hold up well in the longer run despite a year or two of poor monsoons. The longer-term picture is healthy in light of poor mechanization levels in the country’s farm sector and the thrust of the government on improving rural infrastructure.
  • Demand for HCVs is expected to grow by 7% to 8% over the long term. The privatization of select state transport undertakings bodes well for the bus segment.
  • Auto industry has witnessed multiple tailwinds in last two to three years like multi-year low interest rates, subdued metal prices (major raw material), low oil prices (translating to lower petrol prices), however, we see many of these factors showing early signs of reversal. This can result pressure on both the volumes and profitability.
  • The government of India has shown an increased interest towards electric vehicles and has set for an ambitious target of all electric cars by 2030. There is an increasing buzz for e-mobility and all the companies in the sector are preparing themselves for the future. However, this is easier said than done, the necessary infrastructure (charging stations) for e-vehicles will be a major roadblock for government’s ambitious target.

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Related Links for Automobile Sector
Quarterly Results | Sector Quote | Over The Years

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