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)
The Indian automobile market has some amount of excess capacity.
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.
A total of 18.9 m two-wheelers was sold in FY16, a growth of a tepid 2% over the previous year. The slow growth was on account of the tepid recovery in the Indian economy. Motorcycles accounted for 65% of the total two wheelers sold and were flat YoY. The scooters (geared & ungeared) segment was the only hope the two wheeler industry logging in a growth rate of 8% YoY. In the domestic market, volumes in the 3-wheeler segment were up 1% YoY. However, given the currency issues in the major emerging economies the exports declined by 15% YoY.
After good growth in last year, FY16 also proved to be strong year for the medium and heavy commercial vehicles (M/HCVs) segment as volumes increased 28% led by reversal of mining bans, resumption of some stalled infrastructure projects, improvement in freight rates and overall operations of fleet operators. LCVs, after facing a heat in FY15 continued the tepid trend and was flat for the year. As a result, volumes for the overall CV industry grew by 12% YoY.
Volumes of passenger vehicles (PV) declined by 1% YoY. Within this, passenger cars grew by 6% YoY, however with some exciting products launched in FY16, the Utility vehicles (UVs) grew by 11% YoY. Maruti Suzuki remained the market leader in the passenger vehicles space. In addition to the market leader in the passenger car segment, company introduced two landmark products in the Utility Vehicles and thus has started gaining market share in that segment as well.
Most of the companies reported an improvement in operating margins largely on account of various cost rationalization measures undertaken and benign commodity prices.
With the Modi government in power, there are expectations of increased focus on reforms and ramp up in infrastructure. Thus, government spending on infrastructure in roads and airports and higher GDP growth in the future will benefit the auto sector in general. We expect a slew of launches both in passenger cars and utility vehicles (UVs) given that the competition has intensified.
The multi-year low interest rates and subdued petrol prices augurs well for the Indian auto sector. Historically, the demand for the PVs has been negatively correlated to the interest rates. Further, the 7th pay commission payout will also play out well for the auto Industry in FY17.
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.
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