Research Report

Outlook for the auto sector

Publish Date: 24th July, 2018

By: Arun Agarwal

The auto sector, which contributes 7.1% to India’s GDP, can be broadly divided into:

• Two-wheeler segment
• Three-wheeler segment
• Passenger vehicle segment
• Commercial vehicle segment
• Tractor segment

Two-wheeler segment

In terms of volumes, two-wheelers comprise 80% of the total automobile production in the coun-try. However, the two wheeler’s pricing (average of Rs 50,000-Rs80,000 per unit) is much lower compared to cars (Rs 5 lakh average) and commercial vehicles. Therefore, the two wheeler segment’s revenue share is lower.

Historically, the Indian two-wheeler demand was dominated by the gear-scooter segment. But the 1990s saw a shift in demand for motorcycles. Now, there seems to be another structural shift, with un-geared scooters coming at the forefront.

There has been increase scooter sales in recent years. The scooter volumes growth has in-creased from 15% to 33%. The scooter has become popular because it is being treated as a family vehicle in the urban and semi-urban areas.

-   In the scooter space, Honda has around 55-60% market share.

-   In the motorcycle segment, Hero has 50% market share.

-   In the entry-level and deluxe motorcycle segment, Hero Motorcorp has the majority market share.

-   In the premium segment, Bajaj Auto is the market leader.

-   TVS retains the moped stronghold.

Honda is gaining market share, Hero is losing ground because of its focus on the motorcycle segment. The motorcycle segment has remained fairly tepid in the last few years.

The overall outlook for the two-wheeler segment remains healthy. Between FY2012-17, the segment registered mid single-digit volume growth. FY2019 looks good too due to pickup in rural demand and likely volume growth.

Scooter segment will do better than motorcycle segment.

Hero, TVS stocks have been under pressure for last two-three days due to Bajaj Auto’s aggres-sive decision to gain market share at the expense of margins. bajaj Auto is looking to increase its market share from 33% to 45$ in the next two years.

Aluminum and steel costs have increased, which may have an impact on the margins. Although the increase in raw material cost is usually transferred to the consumer, the automakers some-times need to absorb a little bit too.

Our pick: Hero Motorcorp. Due to robust rural demand. But the price war in that segment may have an impact in the near term. Also, Bajaj Auto will see market share gain after a very long time.

Electric vehicles: We do not see any significant impact on the two-wheeler segment in the 2-3 years. In terms of volumes, it will be very small despite various start-ups coming up in India. The volume target the start-ups are eyeing at the moment remain pretty small. Therefore, not overly worried for now. There may be implications in five years’ time.

Passenger vehicle segment

The domestic passenger vehicle industry has grown in single-digits. In the last ten years, CAGR volume growth stands at 8%.

GST implementation, transition to BS-IV were minor glitches in the sector’s profitability.

The UV segment has seen healthy growth. The share of UVs has grown from 15% in FY09 to 28% in FY2018. We expect it to grow further.

Maruti is a key player in the domestic vehicle segment, has been gaining market share in the last 5-6 years, 38% in FY12 to 50% in FY18. The products launched in recent years have been a huge success. That’s the reason for their sustained surge.

Maruti and Hyundai have two-thirds of the total industry volumes.

The top five market players hold 85% market share, suggesting few major players in this seg-ment.

Future

-   New products the key reasons for growth in the passenger vehicle industry. Look at Maruti’s example. Similarly, Renault’s Kwid helped
    the company register sharp volumes growth. There-fore, new products generate growth and momentum.

-   Shift in demand from diesel to petrol. Diesel-run cars earlier accounted for 58% share of total sales. But the demand is moving back to
    petrol. This will help Maruti further as they have more petrol-based vehicles. Overall growth is positive.

-   Rising income levels and penetration shows there is huge scope for this segment to grow in fu-ture as well.

Challenges: Commodity price impact will have margin pressure in this segment too. BS-VI im-plementation FY2020 may have an impact on the demand, largely because of price hike.

Electric cars will not compete with the petrol-diesel duopoly as most carmakers are focused on BS-VI implantation for the time being

Commercial vehicle segment

The commercial vehicle segment is highly cyclical and also depends on how the economy is far-ing. Freight availability and profitability of operators are other factors that can impact this seg-ment.

This segment has grown in the last three years. The sub 7.5-ton vehicles have been growing too.

-   The medium, heavy commercial vehicles (MHCV) industry has seen strong growth in the past few years. In FY13-14, this segment saw a
    23% decline in volumes but post that, the industry has registered robust growth.

-   This segment is dominated by Tata Motors and Ashok Leyland. The two have a 84% market share.

-   The government recently decided to increase the load carrying capacity for freight vehicles by 20-25%. This would result in higher freight
    availability. The new ruling would allow trucks to carry more weight. But we need to check will be put in retrospective effect. If so, the
    demand may be impacted in the near-term.

-   A recent media report suggests that trucks beyond 20 years old will get scrapped. Such news have been passing around for some time
    now. But if this is true, it would be a positive for the MHCV segment as consumers will have to replace their old trucks with new ones.

-   We expect robust demand in the second half of FY2019. However, we’ll need to keep an eye for the government norms.

Tractor segment

The industry saw its domestic sales grow from 300,000 in FY09 to 700,000 in FY18, which is a CAGR of 9%.

The segment saw its volume grow by 20% due to a low base last year.

With the monsoon being normal this year, tractor-makers feel the volume growth would be be-tween 9% and 11%.

Commodity prices have moved up. We believe the margins would be impacted.

Maruti Suzuki and Mahindra and Mahindra are the standout performers in this segment.

We like Maruti Suzuki due to their high market share gain. The company has moved into premi-um space, therefore have pitchforked themselves to a larger market.

Mahindra and Mahindra is doing well too. The company will launch new products this fiscal, which can give them a volume momentum

Q&A

1)   Ashok Leyland: The overall growth in MHCV segment is quite strong. But government norms may have an impact. Positive for the
      long-term but uncertain right now due to lack of norms clarity. However, the 20-year-old MHCV scrap ruling can assist the company’s
      volume growth.

2)   Tata Motors: Share correction in the last 12 months. In Europe, demand for diesel-run vehi-cles have taken a hit. In US, the markets
      have slowed down as well. The concern for JLR is the Brexit uncertainty. That’s a concern because no-one know knows how the Brexit
      deal will happen. Therefore, some pressure on volumes in the near-term but we feel they should be fine in the long-term.

3)   Winner in the electric vehicle space: The entire business is at a nascent stage. It is not ex-pected to stay low for the next two-three
      years. So, no real winner yet.

4)   Eicher Motors: Overall growth has slowed down.

Also read

• Turkish crisis’ impact on India
• A dummy’s guide to Proxy Advisory Firm
• Why ICICI Bank is a good investment pick
• Now, trade via WhatsApp
  

Disclaimer: Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Full disclaimer here