Outlook and Key stats

Indian automobile industry is a key contributor to India’s GDP. At US $ 80 billion, the automobile industry accounts for ~7% of India’s GDP *.

While the Indian economy has grown at ~8% p.a. in the last 5 years (2009-2013), the Indian automobile industry has grown at ~15% during the same period *.

Classification: Indian Automobile Industry

• Two-wheelers,
• Three-wheelers and
• Four-wheelers segment

The segments above can be further classified as passenger and commercial vehicles. Hero Honda and Bajaj Auto are dominant players in the two-wheelers space. Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Ashok Leyland rule the four wheelers space. Tata Motors, Mahindra & Mahindra are famous OEMs across the world.

An Original Equipment Manufacturers (OEMs), i.e. Companies which manufacture products or components which are then purchased by another company and retailed under the other company’s brand name.

Listed Stocks in the Indian Automobile Industry:

Major Developments

Excise Duty Cuts: Given that the sector is going through a sluggish phase of demand, as a short-term measure, excise duty on various automobiles has been significantly reduced for a period up to June 30, 2014. Car sales in the year 2013 reported a drop of almost 5%.

The automobile industry witnessed a phase of extremely high growth between the years 2009 – 2013. With demand slowdown, these excise duty reductions have come as much needed relief, but have so far not incentivized growth in this sector in any meaningful way.

New excise duty Rates: With the notification of announcements in the interim budget, the excise duty on small cars, motorcycles, scooters etc. has been reduced from 12% to 8%; excise duty on SUVs has been reduced from 30% to 24%; duty rate on large and mid-segment cars has been reduced from 27/24% to 24/20%.

Automotive Mission Plan: Prepared by the Ministry of Heavy Industries and Public Enterprises, the Automotive Mission Plan aims to accelerate and sustain growth in the sector until 2016. The plan aims to make India a global automotive hub, with special emphasis on the export of small cars, MUVs, two- and three-wheelers and auto components. The plan also aims to double the contribution of the automotive sector to the country’s GDP by taking its turnover to USD 145 billion and providing additional employment to 25 million people by 2016.

While the automobile sector has been going through a phase of unprecedented slowdown, we believe that the sector will revive over the next 4-6 quarters. The long term prospects in the sector remain robust given strong fundamental factors including India’s demographics and the infrastructure development taking place across the country.

Key Drivers of the Automobile Industry

1. Infrastructure Growth: The Government of India has been focusing on improving road infrastructure through two main umbrella programs – National Highway Development Project (NHDP) and Pradhan Mantri Gram Sadak Yojna (PMGSY). During FY 2013-14 budget, the Government has planned to award a further 8,270 km of projects, higher than originally planned. This presents a significant opportunity for the overall Indian automobile industry – commercial, utility and passenger vehicles.

2. Large consumer base and rising income levels: India is home to 17 % of the global population and is fast emerging as the most attractive consumer markets in the world. This coupled with rising levels of disposable Income is an extremely healthy sign. The rise in income levels is expected to sustain given that India is a young country with an average age of ~ 26.

3. Changing lifestyles, driving demand for new segments: An increase in the number of working women especially in urban areas is particularly boosting the demand for personal transport. Further, the aspirations of younger generation continue to drive the demand for motorcycles, ungeared and automatic scooters and compact cars.

4. Government Regulations and Support: The Government of India (GoI) has recognised the automotive sector as key focus area for improving India’s global competitiveness. The Government formulated the Automotive Mission Plan 2016 for India with a vision to make India a global automotive hub, with special emphasis on the export of small cars, MUVs, two- and three-wheelers and auto components. Some of the policy initiatives include:

• Automatic approval for foreign equity investment up to 100 % of manufacture of automobiles and component is permitted.
• The excise duty on various automobiles has been significantly reduced for a period up to June 30, 2014.

The newly formed NDA government has already given indication to further such initiatives and has allowed 100% FDI in defence equipment manufacturing including – military trucks, jeeps and other means of transportation. The first Union Budget to be presented by the NDA in July 2014, is likely to further provide incentives for this sector.

Key Risk Factors of the Automobile Industry

1. Current slowdown and the Possibility of a further deterioration:

• Uncertainties in infrastructure projects which are a major demand driver for commercial vehicle sales;
• 5-7 % drop in truck freight rates on key routes;
• Oversupply of commercial vehicles in the system in previous years; and,
• a young commercial vehicle fleet plying in the country as compared to 3-4 years ago. Until segments like infrastructure, agri-commodities and industrial growth revive, truck sales are likely to remain sluggish.

The Indian automobile industry is affected substantially by the general economic conditions in India and around the world. A slowdown in the economy is a serious concern for the automobile segment as auto sales are hugely correlated with the economic activity in the country and the purchasing capacity of the customers. Deterioration in key economic factors such as growth rate, interest rates and inflation as well as reduced availability of financing for vehicles at competitive rates may affect the automotive sales in India.

2. Increase in fuel prices: Higher inflation and the constantly increasing fuel prices considerably affect the demand for automobiles in the near term, since these directly increase the running cost of vehicles for the customer and thus also have a negative impact on the demand for vehicles.

3. Interest rates and inflation: Easy availability of low cost finance is one of the key demand drivers for the automobile segment. Consistently high inflation over the past few years has forced the RBI to keep interest rates high which has had a negative impact on the demand for automobiles.

4. Increase in input material prices: commodity prices used in manufacturing automobiles such as steel, aluminium, copper, zinc, rubber, platinum, palladium and rhodium have become increasingly volatile over the past two years. Higher steel prices have especially been a key concern. The auto Industry has to pass on the high raw material prices to the customer by increasing the price of vehicles which of course has a negative impact on the demand and consequently on the overall auto sales.

5. Environmental Regulations: vehicle emission levels, noise, safety and levels of pollutants generated by the production facilities are likely to become more stringent in coming years.

6. Increasing Competition: The global automotive industry is highly competitive and competition is intense in view of the continuing globalization and consolidation in the worldwide automotive industry. Competition is especially likely to increase in the premium automotive categories as each market participant intensifies its efforts to retain its position in established markets while also developing a presence in emerging markets, such as China. The factors affecting competition include product quality and features, innovation and time to introduce new product, ability to control costs, pricing, reliability, safety, fuel economy, customer service and financing terms.

* Perspectives on Importance of Automotive Industry – BCG and SIAM Report, August 2013

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Rajat Sharma

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