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The auto ownership data from the Census 2011 raised and partially
answered 3 questions (a) How fast did the rural car market really grow (b)
Is the urban two wheeler market saturating and (c) How strong is the link
between income/urbanisation levels and car penetration?
Rural car market penetration growth did not outpace urban centres: Data
from the census shows that over the past decade, the percentage of
households that own a car in urban and rural areas increased at the same rate.
The proportion of urban households that own a car increased from 5.6% to
9.7%, while in rural areas, it was up to 2.3% from 1.3%. Of all households that
own a car, the proportion of rural households fell from 37% to 33%.
This is surprising, given that in the past five years, automobile companies have
consistently highlighted the rural market growth. For instance, MSIL reported
that the proportion of its rural sales grew from ~3.5% in FY08 to ~20% in FY11.
In our view, the variance can be attributed to: (a) difference in the definition of a
”rural” area between the census committee and companies, (b) Previously,
rural customers purchased vehicles from urban outlets in the absence of a rural
dealership. These customers may have shifted to the fast-expanding rural
dealers. Hence, while sales from rural channels jumped manifold, the growth in
rural consumption may have been more sedate.
Urban two-wheeler market penetration grew moderately: While the number
of households that own a two-wheeler increased at roughly the same rate as
that of cars (rising ~1.8x over the decade) there was a vast difference in the
rate of increase between rural and urban markets. Rural household twowheeler
penetration increased by 2.1x during the decade (rising from 6.7% to
14.3%); while the comparative figure for urban markets was a mere 1.4x (up
from 24.7% to 35%). This would seem to signal that urban markets may be
closer to reaching saturation levels. Growth in these markets are likely to be
driven by replacement demand rather than new customer acquisitions.
Car penetration linked to income levels/urbanisation rates: Our state-wise
analysis of car ownership patterns suggests a close link between: (a) the
income level of a state, and (b) the proportion of urban population. The r2 with
both these factors is >0.7—indicating a fair degree of correlation. Delhi (high
income/urbanisation) has the highest car penetration level, while Bihar (with
low income/urbanisation levels) has the lowest penetration levels. With both
these factors likely to rise, cars can sustain strong growth in the future.
Overall data demonstrates strong growth potential: The census data
portrays a picture of a developing economy with low, but fast-increasing
penetration levels. While there are some segments that may grow slower than
others (urban two-wheeler market); the overall long-term growth potential
remains strong. We sign off with one statistic to highlight the available growth
headroom: a little less than half the households (~44%) do not own any means
of transport, not even a bicycle.
Data on household vehicle ownership patterns that were collected as a part of the Census 2011 was recently
released*. The data paints a picture of a developing economy with low but fast growing vehicle penetration levels.
However, there were some aspects of the data that raised questions regarding the pattern of growth in the automobile
sector. With the data as a base we raise and attempt to raise three questions:
(a) How fast did the rural car market grow?
(b) Is the urban two wheeler market showing signs of saturation?
(c) Is there a link between income/urbanisation levels and car demand?
How fast did the rural car market grow?
Companies indicate that rural markets grew phenomenally: In the past five years, various automobile companies
have reported a substantial increase in volumes from the rural market. For instance, MSIL reported that the proportion
of rural volumes in domestic sales grew from ~3.5% in FY08 to ~20% in FY11. This would imply that MSIL’s rural car
volumes grew at a phenomenal CAGR of 107% over a three-year period.
However, census data indicates a different picture: According to data from the census, over the past decade, the
number of households that owned cars in urban and rural areas increased at roughly the same rate (the proportion of
urban households that own a car increased from 5.6% to 9.7% over a decade, while in rural areas, the proportion was
2.3% from 1.3%). In fact, of the all-India households that own a car, the proportion of rural households fell to 33% from
37%.
What can account for the difference? There are no clear answers—however, some plausible explanations in our
veiw are:
• Rural distribution sales are not equal to rural sales: Companies like MSIL substantially boosted their rural
distribution network over the past few years. We believe that even prior to expansion, the rural population may
have been purchasing vehicles, but from ”urban” outlets. Hence, for car companies while sales through a rural
network might have increased multi-fold, the total rural sales may have grown at a more sedate rate.
• Classification issues: The definition of a ”rural” area is a subjective matter and automobile companies could
differ with the Census committee. Further, during the last decade, the number of census towns (that is,
defined as urban areas by the Census Committee) increased from 2,774 to 7,935. However, we note that the
impact of this factor may be limited as the proportion of rural population declined only marginally from ~72% to
68%.
• Differential growth rates within the decade: There is no reliable year-on-year data on rural sales. There are
indications though that the rural growth rate was much faster in the second half of the decade. However, we
note that even on an all-India level, sales volumes were more robust in the second half, thereby contributing
greater to the total number of vehicles on the road. Hence, the impact of this factor may have been limited.
So, how fast did rural markets grow? It is difficult to get a clear answer. However, even after accounting for the
above-enumerated factors, we believe ”rural” sales may have grown at a rate slower than previously estimated. While
we do not doubt that the rural car market may have grown at a fast clip (even possibly outpacing the metro markets), it
is possible that the tier-2 and tier-3 towns may have expanded even faster.
Our views should not be construed as a bearishness on the rural sector. With India on the verge of ascending the J
curve, it stands to reason that rural car penetration levels will rise in the coming years. However, the rate at which the
rural market outpaces the urban markets may be up for debate.
* Note: The census gives data on the number of households that own a vehicle. This can be at a slight variance from the normally accepted penetration level definitions
(that is, vehicles/1000 people) as the data does not enumerate the number of households that own more than one vehicle. Nonetheless, given that India is still at the
nascent stages of growth, with very few households with two cars, we believe that the data would give a fairly accurate estimate of the penetration levels in the country.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
The auto ownership data from the Census 2011 raised and partially
answered 3 questions (a) How fast did the rural car market really grow (b)
Is the urban two wheeler market saturating and (c) How strong is the link
between income/urbanisation levels and car penetration?
Rural car market penetration growth did not outpace urban centres: Data
from the census shows that over the past decade, the percentage of
households that own a car in urban and rural areas increased at the same rate.
The proportion of urban households that own a car increased from 5.6% to
9.7%, while in rural areas, it was up to 2.3% from 1.3%. Of all households that
own a car, the proportion of rural households fell from 37% to 33%.
This is surprising, given that in the past five years, automobile companies have
consistently highlighted the rural market growth. For instance, MSIL reported
that the proportion of its rural sales grew from ~3.5% in FY08 to ~20% in FY11.
In our view, the variance can be attributed to: (a) difference in the definition of a
”rural” area between the census committee and companies, (b) Previously,
rural customers purchased vehicles from urban outlets in the absence of a rural
dealership. These customers may have shifted to the fast-expanding rural
dealers. Hence, while sales from rural channels jumped manifold, the growth in
rural consumption may have been more sedate.
Urban two-wheeler market penetration grew moderately: While the number
of households that own a two-wheeler increased at roughly the same rate as
that of cars (rising ~1.8x over the decade) there was a vast difference in the
rate of increase between rural and urban markets. Rural household twowheeler
penetration increased by 2.1x during the decade (rising from 6.7% to
14.3%); while the comparative figure for urban markets was a mere 1.4x (up
from 24.7% to 35%). This would seem to signal that urban markets may be
closer to reaching saturation levels. Growth in these markets are likely to be
driven by replacement demand rather than new customer acquisitions.
Car penetration linked to income levels/urbanisation rates: Our state-wise
analysis of car ownership patterns suggests a close link between: (a) the
income level of a state, and (b) the proportion of urban population. The r2 with
both these factors is >0.7—indicating a fair degree of correlation. Delhi (high
income/urbanisation) has the highest car penetration level, while Bihar (with
low income/urbanisation levels) has the lowest penetration levels. With both
these factors likely to rise, cars can sustain strong growth in the future.
Overall data demonstrates strong growth potential: The census data
portrays a picture of a developing economy with low, but fast-increasing
penetration levels. While there are some segments that may grow slower than
others (urban two-wheeler market); the overall long-term growth potential
remains strong. We sign off with one statistic to highlight the available growth
headroom: a little less than half the households (~44%) do not own any means
of transport, not even a bicycle.
Data on household vehicle ownership patterns that were collected as a part of the Census 2011 was recently
released*. The data paints a picture of a developing economy with low but fast growing vehicle penetration levels.
However, there were some aspects of the data that raised questions regarding the pattern of growth in the automobile
sector. With the data as a base we raise and attempt to raise three questions:
(a) How fast did the rural car market grow?
(b) Is the urban two wheeler market showing signs of saturation?
(c) Is there a link between income/urbanisation levels and car demand?
How fast did the rural car market grow?
Companies indicate that rural markets grew phenomenally: In the past five years, various automobile companies
have reported a substantial increase in volumes from the rural market. For instance, MSIL reported that the proportion
of rural volumes in domestic sales grew from ~3.5% in FY08 to ~20% in FY11. This would imply that MSIL’s rural car
volumes grew at a phenomenal CAGR of 107% over a three-year period.
However, census data indicates a different picture: According to data from the census, over the past decade, the
number of households that owned cars in urban and rural areas increased at roughly the same rate (the proportion of
urban households that own a car increased from 5.6% to 9.7% over a decade, while in rural areas, the proportion was
2.3% from 1.3%). In fact, of the all-India households that own a car, the proportion of rural households fell to 33% from
37%.
What can account for the difference? There are no clear answers—however, some plausible explanations in our
veiw are:
• Rural distribution sales are not equal to rural sales: Companies like MSIL substantially boosted their rural
distribution network over the past few years. We believe that even prior to expansion, the rural population may
have been purchasing vehicles, but from ”urban” outlets. Hence, for car companies while sales through a rural
network might have increased multi-fold, the total rural sales may have grown at a more sedate rate.
• Classification issues: The definition of a ”rural” area is a subjective matter and automobile companies could
differ with the Census committee. Further, during the last decade, the number of census towns (that is,
defined as urban areas by the Census Committee) increased from 2,774 to 7,935. However, we note that the
impact of this factor may be limited as the proportion of rural population declined only marginally from ~72% to
68%.
• Differential growth rates within the decade: There is no reliable year-on-year data on rural sales. There are
indications though that the rural growth rate was much faster in the second half of the decade. However, we
note that even on an all-India level, sales volumes were more robust in the second half, thereby contributing
greater to the total number of vehicles on the road. Hence, the impact of this factor may have been limited.
So, how fast did rural markets grow? It is difficult to get a clear answer. However, even after accounting for the
above-enumerated factors, we believe ”rural” sales may have grown at a rate slower than previously estimated. While
we do not doubt that the rural car market may have grown at a fast clip (even possibly outpacing the metro markets), it
is possible that the tier-2 and tier-3 towns may have expanded even faster.
Our views should not be construed as a bearishness on the rural sector. With India on the verge of ascending the J
curve, it stands to reason that rural car penetration levels will rise in the coming years. However, the rate at which the
rural market outpaces the urban markets may be up for debate.
* Note: The census gives data on the number of households that own a vehicle. This can be at a slight variance from the normally accepted penetration level definitions
(that is, vehicles/1000 people) as the data does not enumerate the number of households that own more than one vehicle. Nonetheless, given that India is still at the
nascent stages of growth, with very few households with two cars, we believe that the data would give a fairly accurate estimate of the penetration levels in the country.
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