Citi :Autos: 2011 Sector Outlook

Visit http://indiaer.blogspot.com/ for complete details �� ��


Play Selectively
 Competitive intensity increasing — Increased per capita income and overall
macro recovery has resulted in rising demand for passenger and commercial
vehicles. However, the number of OEMs has also grown (Indian and foreign),
resulting in heightened competitive intensity across segments— incumbents
thus face the possibility of market share erosion. Product differentiation,
particularly in terms of pricing and after-sales support will determine market
structure.


 2011: A year of capacity creation and new launches — With cost pressures
expected to subside, OEMs have strong product pipelines across product
portfolios, resulting in significant capacity creation. In passenger vehicles,
MSIL, M&M, Toyota, Renault-Nissan and VW have increased capacity to
cater to high demand. In 2Ws, Hero – Honda split may result in new models
from both players, in addition to new launches from incumbents Bajaj, HMSI
and TVS as well as new comer M&M 2Ws. In LCVs, Ashok Leyland-Nissan JV
will start sales in 1QFY12 while Tata Motors has also guided to higher
production in the LCV (Ace) segment—M&M’s Maxximo may get impacted.
GM is also planning LCV launch in India. In MHCVs, TTMT and ALL should
continue to be dominant players in a largely duopolistic market, with slight
erosion in market share from new comers, mainly M&M
 Key risks: Currency, costs and credit — The largest Indian auto company (in
terms of market cap), Tata Motors, has c55% of revenues coming from JLR.
This exposes the company to GBP-USD and GBP-EUR rates. The biggest car
manufacturer, Maruti, also faces high risk in case of an appreciating Yen
(against INR), especially in wake of increased royalty payment to parent
Suzuki. Cost pressures, especially in tyres and steel, will continue to be a

burden on margins, though, we believe, they are past their peaks and will
remain flattish / subside from current levels. Credit crunch in EU may
negatively impact JLR sales as well as MSIL exports (though MSIL mgmt has
proactively diversified from EU). In domestic market also, lack of liquidity
may result in de-growth in demand, especially CVs.
 Top picks: M&M, Tata Motors. Top sell: Ashok Leyland — M&M remains our
top pick in the Auto space, followed by Tata Motors. Ashok Leyland is our
top Sell in the Indian Autos space