AUTOMOTIVE SECTOR REPORT
An Introduction about the factors influencing the sector: 1. Infrastructure/ GDP: Automobiles sales revenue follows economic cycles very closely. This is especially true in the case of sales of HCVs. Availability of good roads is an important determinant for passenger vehicle demand. 2. Affordability: Movement in income and interest rates determine the affordability of new motor vehicles. The ready availability of cheap loans is an important factor driving demand. Disposable income in the rural agriculture sector is increasing. 3. Auto Financing: There are more than 35 financers in the market today, with the State Bank of India being the leader. Easy availability of finance has been one of the most important growth drivers for the auto industry since 2003. 4. Demographics: It is evident that high population of India has been one of the major reasons for large size of automobile industry in India. Factors that may be augment demand include rising population and an increasing proportion of young persons in the population that will be more inclined to use and replace cars. The Indian middle class is growing and is estimated to grow from 50 million currently to 550 million by 2025. 5. Cost of ownership: i. Petrol prices: The price of oil affects the driving habits of consumers and the type of car they buy. During periods of high fuel cost as experienced in 2007 and the first half of 2008, demand for large cars declined in favour of smaller, more fuel-efficient vehicles. The changing patterns in customer preferences for smaller, more fuel-efficient vehicles led to the launch of Tata Motor's Nano – one of the world's smallest and cheapest cars. ii. Diesel: The government's partial de-regulation of fuel prices - freeing up petrol prices while retaining its hold on diesel prices - has skewed sales hugely in favour of diesel cars.Petrol car sales have gone down by 16.5% whereas the diesel cars have increased by 25% since deregulation. iii. Alternative Fuels: The number of CNG vehicles has been growing at a CAGR of 60 per cent in the last two years. CNG distribution network in India is expected to increase to 250 cities by 2018 from 30 cities in 2009. iv. Inflation: Inflation also exhibits a negative correlation with automotive sales revenues. This is due to reduction disposable income and forcing buyers to postpone demand especially in the case of individual buyers. Also an increase in input costs is also generally passed on to the buyer thus moderating the demand further. 6. Exchange Rate: Movement in the value of Rupee determines the attractiveness of Indian products overseas and the price of import for domestic consumption. 7. Localized components: Most of the international companies are moving towards locally made components to improve margins and remain competitive. Renault and Nissan have kept competitive prices of their products due to the same fact along with their strategy of joint production. 8. Retailing:The organized sector of the Indian auto retail market comprises 6,500 automobile dealerships and their workshops, employing more than 0.4 million people directly. Exchange outreach ranges from 15 to 20 per cent in India. In some developed economies, it is as high as 90 per cent. 9. LCV:India is witnessing a structural change with sales moving towards LCV with the prevalence of hub and spoke model. Launch of sub one tone 4 wheeler models has furthered the demand. International trends indicate strong future potential for LCV growth. India has one of the lowest LCV-MHCV ratios thus pointed to huge potential.

CURRENT SCENERIO OF THE INDUSTRY: Risks faced by sector

1. Economic Scenario:The general economic scenario affects the industry prospects as consumers defer the purchase decision in case of worsening conditions. The exports also suffer as a result. Some economic factors that impact the auto sector are as under: i. Rising Interest rates: High interest rates make it difficult for the customers to finance their purchases. The effect is even more widespread as 85% of the purchases are through financing.
Of late the RBI has been fusing the market with liquidity by bringing down the CRR.The current credit policy has the Repo rate at 8.0 per cent and the Cash Reserve Ratio to 4.5 per cent. This although should increase liquidity before the main festive season but the high interest rates would prevent sales from increasing by making debt costly for buyers. ii. Moderating growth: The Industrial growth as measured by GDP estimates and IIP have shown a considerable decrease due to strict monetary policy and rising inflation. iii. Fears of Global Slowdown: The European debt crisis has the potential to bring in another period of slowdown. This is affecting the Indian auto exports and the Indian economy as well (which in turn affects the auto sector). iv. Weakening Rupee: Rupee had depreciated as much as 30% against the dollar since April last year. Since import bill is nearly 20% of the sales value for manufacturer (either through vendors) has created severe pressure for the industry. v. Inflation/Input costs: These have a direct bearing on the cost competitiveness of the sector. Rising input costs, particularly of crude oil, steel, rubber and plastics decrease the profit figures of the companies unless the increase is passed on to the consumer (in which case the demand gets stifled).In 2012, the components or commodity prices have gone up in the range of 10-60 per cent due to inflation, except for rubber which has come down by 30 percent, apart from which all other components have continued to shoot up so long as the inflation is at higher level.
The above figure shows the effect of rise in commodity prices on the material cost as percentage of sales from 2011 to 2012. It has increased for almost all the companies. Thus it is a cause of worry for the industry. vi. Increase in fuel prices: It results in higher operating costs for the vehicles which results in depressed sales. Also, higher petrol prices in comparison to diesel prices have resulted in demand ratio of 70:30 in favour of diesel cars. 2. Infrastructure: Higher road penetration increases demand for the passenger cars and two wheelers while corridors like the Golden Quadrilateral affect the demand of commercial vehicles. Also the introduction of electric cars is hampered due to scarcity of power in India. There is a 13% peaking and 8% average shortage of power annually.
Highways constitute only 2% of the total road network in India. In comparison to 25000 km of expressways in China in 2007, India had only 3700 miles of such roads which hamper industrial development and hence the demand for commercial vehicles. Beijing plows about 9% of its GDP into public works, compared with New Delhi's 4%. 40% of India’s villages do not have access to all-weather roads. While the motor vehicle population has grown from 0.3 million in 1951 to over 37 million in 2012, the road network has expanded from 0.4 million km to 4.2 million km, only an 8 fold increase in terms of length during the same period. 3. Labour issues: The industry has from time to time demanded relaxation in the labour laws so that the cost competitiveness could be improved. Another point of concern is the labour unrest.Maruti’s total losses due to labour unrest last year stand at close to Rs.2500 cr., following strikes by 800 workers at Manesar plant regularly that crippled production and in the current year following the death of one of its managers the company had declared a lock-out at its Manesar plant causing it a production loss of 1200-1400 units of Swift and DZire models which are highly popular and are causing the company a loss of Rs.90 cr. daily. In the current year the company Q1 results say its profit has decreased by 23%, till date the company has had a loss of 83000 units of production. Assocham predicts that if the scenario remains gloomy then the Gurgoan-Manesar-Daruhera belt which employs nearly one million people in the auto industry may see further job losses with the closure of many ancillaries dependent on Maruti Suzuki. 4. FTAs: As part of the FTA negotiations (e.g. the on-going one with the EU), foreign countries demand duty cuts on their automobile exports to India. If it happens then Indian auto sector would face increased competition as their price competitiveness would be hit. Also the industry fears this may result in decrease in FDI in setting up of manufacturing plants by foreign companies in India as they would find imports cheaper. The Indian auto sector sits inside a tariff wall of 60-100%. Thus the Indian players might suffer in case tariffs come down. 5. Technology limitations: The R&D capability of the Indian players is still limited which hinders the development of new age models. Adherence to the strict environmental norms in the western markets needs advanced technology. To increase exports safety and emission standards would need to be improved which again demand an advanced level of technological competence. Indian automotive components manufacturers are dependent on the global majors for technology. Also the Indian companies lack the technology to develop hybrid and electric vehicles on their own.Except Tata Motors (even it acquired JLR and Daewoo to gain access to world class technology in cars and commercial vehicles respectively), the Indian companies aren’t as strong as their global counterparts in terms of technological advancement (capability to develop technology themselves).Therefore even though being the leaders in their segments Maruti Suzuki and Hero Honda ended up paying hefty sums as royalty to their partners Suzuki and Honda. After the spilt of Hero and Honda hero has seen decrease in its profits to its lowest level in the decade with people shifting towards more of Honda bikes in the 80 cc to 125cc segments which provides Hero Motorcorp its maximum sales.

Future Outlook

Constantly high interest rates, contracting industrial output and a considerable increase in vehicle prices coupled with high-base effect of previous years are the main factors impacting growth. Since GDP forecasts are becoming less optimistic MHCV sales volumes are expected to follow the trend. The increase in diesel prices has also reduced the profitability of transporters.According to the research firm the passenger cars segment grew by 5.2%, during the first 3m FY13, while Utility Vehicles (UVs) and Multi Purpose Vehicles (MPVs) reported a growth of 53% and 10.3%, respectively. During April-June 2012, the domestic CV industry posted a growth of 6.06% on YoY basis due to low demand of M&HCVs.
The month of August has seen a decrease of 3.9% in all categories with Passenger car segment being the most sluggish with a decrease of 18.56% followed by the Two-wheeler segment which contracted by 4.5% and the three wheelers saw a decline of 0.18%, with the only silver lining of the Commercial vehicles that grew by a modest 3.92%. Exports and Production both were down by 11.54% and 7.01% respectively.
Passenger Vehicles
The Indian passenger vehicle (PV) industry has experienced a period of strong volume growth in the last five years as demand and supply tangoed, the industry’s volumes grew at 16.3% CAGR during 2007-11, with growth being particularly strong in the last two years. However, since the beginning of 2012-13, the industry has been witnessing a slowdown in volume growth marred by rising inflation, hardening interest rates and increasing fuel prices that have combined to dent consumer sentiment. Even the festive season is appearing to be on the verge of a failure to stoke domestic demand despite new model launches, aggressive discounts and promotional schemes offered by OEMs.
OEMs may continue to face challenging times at least over the short term as sluggish demand on one hand and increasing competition on the other may restrict earnings growth. While we expect PV volumes (domestic + export) to grow at ~11% CAGR over FY12-16, the growth in FY12 may remain tepid at around 11-13%.
Commercial Vehicles
After registering a strong 30%+ growth over the past two fiscals, the growth in the Commercial Vehicle (CV) industry has somewhat slowed down during the current year.Steadily rising interest rates, contracting industrial output and a considerable increase in vehicle prices coupled with high-base effect of previous years are the main factors impacting growth. The operating environment for fleet operators has been deteriorating over the past six months. All factors that influence the viability appear to be weighing against the profitability and cash flows of operators. The sharp rise in overall cost of ownership combined with considerable rise in operating costs and an almost stagnant freight rates in a confluence are displaying signs of pressures on fleet operators.
Given the current environment where the growth in industrial activity is at a two year low and the operating environment for fleet operators is gradually weakening, we expect the industry to defer capacity addition. As a result, the outlook for the near term appears to be subdued, resulting in a slowdown in new vehicle sales. Among segments, M&HCVs which tend to be more influenced by the macro-economic indicators is likely to register a weaker performance over the near term as against the steadily growing LCV segment. The proliferation of the hub-n-spoke model, improving last mile connectivity and last but not the least the strong demand originating from rural segment is likely to drive demand in the LCV segment over the medium term. We expect the M&HCV industry to grow by 6-8% in FY13 and LCV industry by 16-18% in FY13.
Long-term growth outlook for M&HCV with a CAGR (%) of 9.5-11.5% and for LCV with CAGR of 11-13% over the next five years is expected.