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Sector thesis: entering a bull phase
We have a Positive rating on the sector as we believe auto-sector volume will
remain robust, driven by favourable demographics, strong increases in personal
income levels, rising employment opportunities, and improvements in
infrastructure. We forecast passenger-car volume to increase at a 20% CAGR over
the next three years, outpacing that for two-wheelers of 12%. We expect
commercial-vehicle demand to remain robust in FY12, after which we believe it
will moderate in FY13 and FY14. The auto stocks under our coverage are trading
currently at a 10% PER premium to their average PERs since 1993, which we
believe is justified as the economy is entering a higher-growth phase over the next
five years compared with the past five years. This is due to increases in personal
income and more young people entering the jobs pool.
Structural outlook: three-year view
We believe we could reach a stage by FY12 whereby income levels in India reach
an inflection point that results in a passenger-car volume CAGR of more than 20%
from FY12-17. We expect the two-wheeler sector to expand at a slower pace than
four-wheelers due to a higher penetration level. We believe the leading auto
suppliers will provide better returns than the auto manufacturers as they are likely
to face relatively less competition, have better pricing power, and record higher
revenue growth as they look to tap both domestic- and export-market opportunities.
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