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That India is an underpenetrated automobile market with rapidly rising income levels is a well known/discussed fact. In this report, we attempt to look beyond the obvious growth factors by analysing certain aspects of the Indian market that may have stayed below the radar but are nonetheless instrumental in shaping the rate and pattern of growth in the automobile sector. Some of these unusual factors are: State-wise income distribution patterns, poor execution by Indian Railways (IR) and rising labour wages.
n State-wise income distribution: Impacting the car “J” curve
India is on course to hit the “J” curve in the car market, when car penetration levels rise at a hyper rate, as was the case in China. We believe two key differences between India of 2010 and China of 2002 in (a) income distribution patterns at a state/ province level and (b) urbanisation rates, may have delayed India’s ascent on the “J” curve to FY13. Further, as a result of these differences, we believe that while India could witness a sustainable high growth rate (of ~20%), it may not replicate the hyper growth of China (in excess of 30%).
n Commercial vehicles: Weak railways boosting truck demand
A ~30% growth in truck demand for two consecutive years has led to concerns of overcapacity in the freight market. However, we argue against these fears by highlighting two key factors: (a) freight capacity growth, despite strong truck volumes in the past two years, has lagged demand; and (b) IR, with poor execution in capacity expansion, has failed to capitalise on growing freight demand, leading to a shift towards roadways.
n Structural shift in rural areas: Tractor market to benefit
Three key structural factors—higher farm product prices, firmer labour wages (due to government schemes such as NREGA), and greater commercial usage of tractors—have significantly boosted rural incomes and brought smaller farmers (owning <4 hectares of land) into the “tractor purchasing” ambit. This, we believe, will drive tractor demand at a faster rate than in the past few years.
n Top picks: Mahindra & Mahindra, Tata Motors; Cautious: Maruti
With potential headwinds - an increase in interest rate and higher fuel prices- coupled with a high base we expect growth rates across the automobile sector to taper off to the mid teens (from > 25% in FY11). Competitive intensity (a determinant of pricing power and consequently profitability) remains benign, except in small car and light commercial vehicle segments.
Mahindra & Mahindra (M&M) and Tata Motors (TTMT) are our top picks. M&M, with its leadership position, is a strong play on the structural change in the tractor market. TTMT fares robustly with the stunning and seemingly sustainable turnaround of Jaguar Land Rover (JLR). We are cautious on Maruti Suzuki (MSIL), wherein despite potential strong volume growth we expect competitive intensity to keep profitability under pressure.
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