Automobiles sector entering a sweet spot? - Crisil

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Automobiles sector entering a sweet spot?

February 4, 2016

1

Demand recovery across segments in 2016-17; monsoon remains key monitorable 20 18 14-16

14 10-12

9-11 7-9

growth in per cent

5-7

7 5

4

-2

8 2-4

3

1

11

-2

-3 -5

(7)-(9)

-20

Commercial Vehicles (0.62 mn units)

Cars and UVs (2.6 mn units)

Two Wheelers (15.9 mn units)

Tractors (0.55 mn units)

2016-17 P

2015-16 P

2014-15

2013-14

2012-13

2011-12

2016-17 P

2015-16 P

2014-15

2013-14

2012-13

2011-12

2016-17 P

2015-16 P

2014-15

2013-14

2012-13

2011-12

2016-17 P

2015-16 P

2014-15

2013-14

2012-13

2011-12

-13


11-13

P: Projected Notes: 1) All numbers pertain to domestic market. 2) 2012-13 and later year numbers for cars exclude sales of Audi, BMW and Daimler 3) Yellow denotes forecast 4) Numbers in brackets denote unit sales for 2014-15 Source: CRISIL Research 2

Regulatory landscape (1/2) Cars and UVs



BS-IV norms applicable in 63 cities.



April 1, 2017 deadline for applicability for entire country



BS-VI norms applicable from April 2020



Intermediate BS-V to be skipped

Impact 

Diesel vehicle prices to increase more steeply compared with petrol vehicles; price hike based on engine capacity



No new capacities required, only technology to be upgraded for existing platforms



Multinational companies have technology but will have to incur cost for implementing across platforms; homegrown players to invest in R&D or borrow technology


Current Scenario Emission norms

3

Regulatory landscape (2/2) Commercial Vehicles 

2015-16: Bus Body Code, Mandatory ABS and speed arresters, BS-IV implementation in North India, NGT ban on diesel vehicles > 10 years in NCR



Future: –

BS-IV applicable in the south and a few states in the west in April 2016 with pan India applicability in April 2017

–

Skipping BS-V and adopting BS-VI by April 2020

Impact: 

2015-16: MHCV sales preponed to Sep 2015 which saw a 60% y-o-y increase; Bus sales rose by 50% in July 2015



Future: –

Preponement of MHCV replacement demand to March-April 2017

–

No new capacities required; few powertrains, however, may not able to support BS-VI


Current Scenario

4


Cars & UVs

5

Small cars to drive PV growth in 2016-17 Rise in disposable income, stable cost of ownership and pay commission to drive sales in 2016-17 32 20 7-9

13

8-10

6-8

1

0 (1)

3-5

5

4

1

9-11

11-13

(34)

(1)

(6)

(9)

Small Cars (1.62 mn units)

Sedans (0.26 mn units)

Uvs & Vans (0.73 mn units)

2016-17P

2015-16 E

2014-15

2013-14

2012-13

2011-12

2016-17P

2015-16 E

2014-15 E

2013-14

2012-13

2011-12

2016-17P

2015-16 E

2014-15

2013-14

2012-13

2011-12

2016-17P

2015-16 E

2014-15

2013-14

2012-13

(25)

Cars& Uvs (2.60 mn units)

E: Estimated ; P :Projected Notes: 1) All numbers pertain to domestic market. 2012-13 and later year numbers exclude sales of Audi, BMW and Daimler. 2) Yellow denotes forecast. 3) Numbers in brackets denote unit sales for 2014-15. Source: SIAM, CRISIL Research



Growth momentum to accelerate in 2016-17 backed by an improvement in economic growth, rural demand and lower cost of ownership; Implementation of the seventh pay commission will provide an additional kicker to growth



Sedan growth to moderate due to stiff competition from compact utility vehicles (UVs)


14

12-14

4

2011-12

growth in per cent

11-13

6

9%

9%

9%

8%

7%

6%

13% 0%

14% 0% 10%

19%

19%

15%

21%

7%

0% 9% 3%

2% 7% 2%

2% 8% 2%

5% 7% 3%

33%

36%

39%

41%

44%

27%

23%

24%

21%

20%

2011-12

2012-13

2013-14

2014-15

2015-16YTD

6%

33%

30%

2010-11

Micro & Mini

Compact

Compact sedans

Sedans

Compact Uvs

Other Uvs

Vans

Notes: 1) YTD: April-November 2) Compact sedan includes Hyundai Xcent, Honda Amaze and Maruti Swift Dzire. 3) Compact UV includes Ford Ecosport, Renault Duster, Hyundai Creta, Maruti S cross and Mahindra TUV300. Source: SIAM, CRISIL Research



Premium hatchbacks (positioned between hatchbacks and entry-level sedans) have seen strong growth, thereby expanding the share of the compact segment



Compact UVs have attracted sedan customers with aggressive pricing, premium features and petrol variants


Compact cars and UVs garner consumer interest

7

Rising competition and shortening model life impacting costs of car & UV players Player interest, model launches rise across segments Segments

Best selling Models

Share in overall sales

62 44

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16YTD

7

Small cars

21

20 14

Sedans

No. of players

Uvs

Small Cars 2009-10

Alto

WagonR

I-10

42%

2012-13

Alto

Swift

Wagon R

41%

2015-16 YTD

Alto

Dzire

Swift

38%

2009-10

Dzire

Honda City

Verna

53%

2012-13

Dzire

Verna

Etios

46%

Honda City

Ciaz

Dzire Tour

62%

2009-10

Bolero

Innova

Scorpio

60%

2012-13

Bolero

Ertiga

Innova

49%

2015-16 YTD

Bolero

Ertiga

Innova

33%

Sedans

No of models

Source: CRISIL Research



Reducing life of models and shortening model refreshment cycles impacting costs



R&D spends of leading Indian players now average closer to global players at 4-6 per cent of total revenues



UV segment has seen maximum action in terms of player interest and new model launches

2015-16 YTD


13 14

15 17 14 13

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16YTD

14

33

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16YTD

31

Utility Vehicles

8

Growth to remain healthy in the long-term Higher real GDP and stable cost of ownership to drive long term PV sales

Addressable households to jump by over 50 million 285

262 238

FY15-20

11-13%

6%

64 31

FY 05-10

13%

2009-10E

2014-15E

Total Households (mn) Total passenger vehicle population (mn)

P: Projected Numbers represent 5-year CAGRs Source: SIAM, CRISIL Research

35

22

12

2019-20P Addressable households (mn)

HH: Household, E: Estimated; P: Projected Source: CRISIL Research



Passenger vehicles growth potential remains high given low PV penetration (18 per 1,000 people as of FY15)



Manifold expansion in addressable market with rising incomes and low cost of ownership



Rising rural penetration to support growth in small car sales


115

FY10-15

9


Two-wheelers

10

Gradual recovery in two-wheeler sales projected in 2016-17 24

23

25 17-19

14

12

growth in per cent

4 0

12-14

11

6-8 3

3-5

3

2

0-(2)

(2)-(4)

2016-17P

2015-16 E

2014-15

2013-14

2012-13

2011-12

2016-17P

2015-16 E

2014-15

2013-14

Scooters (4.5 mn units)


Motorcycles (10.7 mn units)

2012-13

2011-12

2016-17P

2015-16 E

2014-15

2013-14

2012-13

2011-12

-8

Mopeds (0.74 mn units)

E: Estimated ; P :Projected Note: Figures in bracket indicate domestic sales volume in 2014-15. Source: SIAM, CRISIL Research



Weakness in rural income hurting motorcycle sales; pick-up seen only in H2 2016-17 if monsoon is normal



Scooter sales, though moderating, is expected to improve due to:



–

Improving rural and semi-urban infrastructure

–

Rising proportion of women in the workforce

–

Improving mileage

Income boost provided by Seventh Pay Commission to buoy demand; scooters could benefit more

11

Rural market and scooters segment to drive to two-wheeler industry long-term growth Urban markets: Limited scope for growth 120

90

80

80 100

67

70 60

49 50 60 40 40

Long term demand growth to remain stable

30 20

20 73

67

85

82

97

96

0

2019-20 P Segment

10

Volumes ('000s)

5 yr CAGR

15,067

6-8%

0 2009-10

2014-15

Urban Total HH (millions)

Add. HH (millions)

2019-20P

Motorcycles

TW penetration (per cent of add. HH) (excl. mopeds) (RHS)

Scooters

9285

14-16%

Mopeds

954

4-6%

25306

8-10%

Rural markets: Good potential for further growth 200

60 50

180

50

160

Total two-wheelers

39

140

40

120

Source: SIAM, CRISIL Research

29

100


80

30

80 20

60 40 20

10 161

73

173

103

183

142

0

0 2009-10 Rural Total HH (millions)

2014-15 Add. HH (millions)

2019-20P TW penetration (per cent of add. HH) (excl. mopeds) (RHS)

P: Projected; HH: Household; TW: Two-wheeler Source: SIAM, CRISIL Research 12

Competition heating up as players jostle for market share

16%

18%

5% 20% 0%

22% 1%

61%

72%

12%

46%

56%

37%

24%

14%

2013-14

2015-16YTD

4% 2015-16YTD

2013-14

Economy

18%

24% 2%

8% 11%

13% 7%

37%

38%

2013-14

2015-16YTD

Executive Bajaj

Hero

Tvs

Yamaha

Honda

Premium Royal Enfeild

Suzuki

Others

YTD: Year-to-date Source: SIAM, CRISIL Research

  



Shift from executive motorcycles to economy at the lower-end and to premium motorcycles at the higherend Success of Bajaj’s CT 100 (launched in latter part of 2014-15) brings it closer to Hero in economy segment Hero has further consolidated its share in high-volume executive segment, backed by its flagship Splendor, Passion and Glamour brands; Bajaj’s market share declining as Discover’s relatively weak performance continues Competition heating up in premium segment with Royal Enfield and Yamaha outperforming peers; Bajaj remained market leader with Pulsar and KTM series but its share is declining due to stiff competition


Change in market share of players in motorcycle segment

13


Commercial vehicles

14

Overall CV sales to accelerate in 2016-17 40

30

30

21

16

20

4-6

10

22-24 18 10-12

9

11-13

6

5-7 7-9

7-9

0

0 (3)-(5)

-20

-18

-2

-4

-13

-3

-14 -20

-30

-26 -27

LCVs (0.34 mn units)

MHCVs (0.20 mn units)

Buses (0.08 mn units)

2016-17P

2015-16E

2014-15

2013-14

2012-13

2011-12

2016-17P

2015-16E

2014-15

2013-14

2012-13

2011-12

2016-17P

2015-16E

2014-15

2013-14

2012-13

2011-12

2016-17P

2015-16E

2014-15

2013-14

2012-13

2011-12

-40

CV domestic volumes in 2014-15 (0.62 mn units)

E: Estimated; P: Projected Source: SIAM, CRISIL Research



Despite lower growth trajectory, MHCV sales to sustain at healthy levels in 2016-17 –




-10

Growth forecast to moderate over a high base due to slowdown in replacement demand by LFOs despite modest improvement in macro economic signals (industrial growth, infrastructure projects, mining activity & agricultural output)

LCV sales to recover slightly in 2016-17 on higher consumption spends and improved financing availability –

Subdued rural income and high NPAs of financiers to limit the recovery over a low base 15

Moderate growth expected in long term Long term demand Segment

2014-15 over 2009-10 (5-year CAGR in %)

2019-20P over 2014-15 (5-year CAGR in %)

2011-12 (volumes in 000s)*

2019-20 (volumes in 000s)

LCV (goods)

6.2%

11-14%

411

608

MHCV (goods)

-0.4%

10-12%

299

330

Buses

0.7%

8-10%

99

126

Total (growth / units)

2.9%

10-13%

809

1064

P: Projected * 2011-12 was peak in terms of CV sales volumes Source: CRISIL Research



CV sales to rise 10-13% CAGR over a low base in 2014-15 on gradual revival in economic growth



Competition from Railways to increase in long-term, post commissioning of DFCs



Key long term trends to watch out for are: GST implementation, dedicated freight corridors’ (DFCs) project progress, and changes in emission and scrappage norms


Commercial vehicles (domestic)

16


Tractors

17

Sales growth to pick up modestly across regions in 2016-17; South and West to outperform Sales units - High tractor penetration

4,00,000

- UP and Punjab to drive the revival in FY17

3,50,000

- Replacement demand in this highly penetrated region will also be a driving factor

3,00,000

- Sales volumes to be stable in Rajasthan

2,50,000

- Maharashtra and MP to be laggards due to deficient rainfall and poor irrigation infrastructure

- To show resiliance in FY16 as compared with other regions

- Lower base will help propel FY17 growth rates - Low tractor penetration

15.6% 11-14%

(10)%

28.9%

(9)% 2,00,000

16-19%

(20)% (15.5)%

1,50,000

- Increased focus of government on agri development to support sales volume in FY16

- Andhra Pradesh to lead on the back of better rabi expectations in FY16. Better irrigation also to improve sentiments - Tamil Nadu to lead, most of which will be replacement sales

- Better impetus given by financiers to boost demand

15-17% 1,00,000

17%

10%

11-13%

(15.5)%

(7)%

(2)%


4,50,000

(5)%

50,000

0 North

West 2013-14

2014-15

East 2015-16 P

South

2016-17P

Source: TMA, CRISIL Research

18

Increasing mechanisation needs to drive growth over next 5 years

12%

13% 11%

12%

10%

Rolling 5 year CAGR (RHS)

2019-20P

Tractor Domestic sales

2014-15

2013-14

2012-13

2011-12

2010-11

6%

Key growth drivers between FY09 & FY14 (16 per cent CAGR)

Key growth drivers between FY15 & FY20 (8-10 per cent CAGR)

10-15 per cent growth in MSPs

High growth in MSPs not sustainable

NREGA scheme led to limited availability of farm labour

Purchase of better seeds leading to better farming methods and increasing use of implements

Increasing land prices leading to purchase of commercial assets with extra income

Predominant use in land preparation and haulage; tractors extending to other farming activities

Increasing availability of finance & more private financers

Gradual evolution of agriculture practices in India such as lease farming, contract farming, cooperatives and producer companies to support gradual penetration in fragmented lands

Financing for used tractors, especially in the North, leading to shortening of replacement cycles


18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

16%

2009-10

900 800 700 600 500 400 300 200 100 0

2008-09

Units in '000s

(in '000s)

19

Key messages Structurally in a sweet spot, but monsoons the key for some segments  Automobile sector structurally in a sweet spot with real income growth expected to accelerate and cost of ownership* of automobiles expected to remain more or less flat

−

Better economic growth, rural demand, stable cost of ownership and model launches to drive offtake

−

Implementation of Seventh Pay Commission seen as additional growth driver; small cars to benefit

 MHCV growth momentum to decelerate in fiscal 2017 −

Strong growth in MHCV sales to moderate over a high base (as regulatory changes preponed demand to fiscal 2016) despite improvement in macro economic parameters

−

LCV sales to gradually revive in H2 2016-17 assuming normal monsoon and improvement in financing scenario

 Two-wheeler demand to gradually recover in fiscal 2017 −

Motorcycle sales pick up seen only in H2 2016-17 and that too, only if monsoons are normal

−

Scooter sales propelled by structural factors (improving rural/semi-urban road infrastructure & consumer preference); Seventh Pay Commission implementation to further boost sales


 Passenger vehicle sales growth to further accelerate in fiscal 2017

* Includes all costs incurred for purchasing an automobile and running it regularly 20

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Last updated: August, 2014

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21