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Automobiles: Sector Outlook
Moderate growth expectation amidst cost concerns: Auto sales volume has increased by
28% YoY in the nine months ended December 2010, mainly due to rising disposable income
and buoyancy in the economy. We expect moderate industry growth next year in view of a
higher base effect and rising interest rates. We believe auto sales will increase by 17% YoY
in FY12E, down from ~27% in FY11E. Further, profitability of the OEMs will be impacted by
~150-200bps due to rising costs of key inputs like steel, aluminium and tyres. Due to high
competition in cars and the two-wheeler space, we expect advertisement and selling
expenses to remain elevated, which will further put pressure on margins.
�� Competition intensifying in two wheelers. Motorcycles will continue to grow on the back
of increasing rural penetration and stable urban demand. We expect two-wheeler sales
growth to remain strong at 18%; however, it will come off from >25% in last two years,
mainly due to a higher base. Scooters will likely grow at 20% in FY12E despite capacity
constraints, due to strong urban demand. HMSI’s aggressive plans of launching an
economy bike (10% cheaper than the lowest priced bike in the market), coupled with
expansion of its dealership network, will increase competition in the domestic market.
Exports may also get impacted by ingress of cheaper Chinese bikes in the African market,
which is the largest market for India manufacturers.
�� Prefer UVs over cars in passenger car segment. The passenger car market has grown
by ~28% in 2010, due to rising disposable incomes, easy availability of finance and a
variety of new models launched in the compact and the mid segments. We believe the
momentum will continue in FY12, albeit at a lower pace, due to interest rates tightening.
The long waiting periods on recently launched models and strong pipeline of upcoming
launches (~50) gives confidence of 17% volume growth in FY12. We expect utility vehicles
to grow by 13% in FY12E on the back of rising tourist arrivals, improving business
sentiment and new launches in the MPV space. Competition in the high volume A2
(compact) segment is set to intensify as new players like Nissan, Ford and Volkswagen
ramp up capacities. Passenger car players may face profitability pressure due to partial
pass-through of increased raw material costs as competition remains high and higher
selling expenses on new launches.
�� Strong outlook for commercial vehicles, but risks are rising. We expect domestic CV
industry to grow by 15% in FY12E supported by continuous growth in economic activity
and growing consumption expenditure. We believe the domestic LCV goods segment will
clock the best growth rate of 20% due to growing consumption-led demand, a favourable
business environment and easy financing for first-time buyers. The domestic M&HCV
goods segment is likely to register 12% growth on the back of increasing industrial and
agricultural activity, infrastructure development and improved transporter profitability. The
M&HCV buses segment is likely to grow at 10% as inter-city passenger transport through
luxury buses increases. The segment will also get boost from improving road
infrastructure. Key risks to the CV segment growth are 1) diesel price hikes due to rising
crude oil prices and 2) interest rates hardening. Both these factors may impact profitability
of transporters’ and can limit CV manufacturers’ ability to increase prices without risking
loss of demand.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Automobiles: Sector Outlook
Moderate growth expectation amidst cost concerns: Auto sales volume has increased by
28% YoY in the nine months ended December 2010, mainly due to rising disposable income
and buoyancy in the economy. We expect moderate industry growth next year in view of a
higher base effect and rising interest rates. We believe auto sales will increase by 17% YoY
in FY12E, down from ~27% in FY11E. Further, profitability of the OEMs will be impacted by
~150-200bps due to rising costs of key inputs like steel, aluminium and tyres. Due to high
competition in cars and the two-wheeler space, we expect advertisement and selling
expenses to remain elevated, which will further put pressure on margins.
�� Competition intensifying in two wheelers. Motorcycles will continue to grow on the back
of increasing rural penetration and stable urban demand. We expect two-wheeler sales
growth to remain strong at 18%; however, it will come off from >25% in last two years,
mainly due to a higher base. Scooters will likely grow at 20% in FY12E despite capacity
constraints, due to strong urban demand. HMSI’s aggressive plans of launching an
economy bike (10% cheaper than the lowest priced bike in the market), coupled with
expansion of its dealership network, will increase competition in the domestic market.
Exports may also get impacted by ingress of cheaper Chinese bikes in the African market,
which is the largest market for India manufacturers.
�� Prefer UVs over cars in passenger car segment. The passenger car market has grown
by ~28% in 2010, due to rising disposable incomes, easy availability of finance and a
variety of new models launched in the compact and the mid segments. We believe the
momentum will continue in FY12, albeit at a lower pace, due to interest rates tightening.
The long waiting periods on recently launched models and strong pipeline of upcoming
launches (~50) gives confidence of 17% volume growth in FY12. We expect utility vehicles
to grow by 13% in FY12E on the back of rising tourist arrivals, improving business
sentiment and new launches in the MPV space. Competition in the high volume A2
(compact) segment is set to intensify as new players like Nissan, Ford and Volkswagen
ramp up capacities. Passenger car players may face profitability pressure due to partial
pass-through of increased raw material costs as competition remains high and higher
selling expenses on new launches.
�� Strong outlook for commercial vehicles, but risks are rising. We expect domestic CV
industry to grow by 15% in FY12E supported by continuous growth in economic activity
and growing consumption expenditure. We believe the domestic LCV goods segment will
clock the best growth rate of 20% due to growing consumption-led demand, a favourable
business environment and easy financing for first-time buyers. The domestic M&HCV
goods segment is likely to register 12% growth on the back of increasing industrial and
agricultural activity, infrastructure development and improved transporter profitability. The
M&HCV buses segment is likely to grow at 10% as inter-city passenger transport through
luxury buses increases. The segment will also get boost from improving road
infrastructure. Key risks to the CV segment growth are 1) diesel price hikes due to rising
crude oil prices and 2) interest rates hardening. Both these factors may impact profitability
of transporters’ and can limit CV manufacturers’ ability to increase prices without risking
loss of demand.
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