>Indian Automobile Sector (HSBC)

●Recent growth not sustainable. The car industry’s recent growth was aided by central government employees, who received arrear pays and pay hikes due to the Sixth Pay Commission recommendations. Their contribution to total sales doubled to ~16% in February 2009 for the industry. Management said sales were positively affected by a low base, inventory push and bunching up of demand, driven by heavy discounts and excise duty reduction. Retail sales have started to slow down. We expect sales growth to dry up from Q2 2009 onwards. Rural India is a small contributor. In India, the car is still largely an urban product. Small centres contribute no more than ~15% to total car sales in the industry. Although small centres are growing healthily, the company believes that it may not be sufficient to counter the slowdown in urban centres.

●Credit may not be a growth driver. Private banks continue to be cautious about lending to this sector whereas the State Bank of India is still lending, although mostly to its own customers. Of late, the credit situation has improved marginally, with sales on credit at ~60% for the industry, although this is nowhere close to the 90% level of last year. In the near term, management expects credit may not be as strong a growth driver for the industry overall as it was during 2004-2008.

●Macro environment remains adverse. The outlook for the Information Technology Enabled Services sector, export-related sectors, financial services and the manufacturing sector has deteriorated as is evident from slowing GDP growth. The fear of lay-offs persists, which is the one of the biggest negatives for car demand.

●Bleak outlook for FY10. Car sales have a high correlation with industrial and services GDP growth. Given the economic slowdown, the outlook for car sales is poor. We believe the talk of recovery is premature. We remain pessimistic about the outlook for the Indian auto sector.

To see full report: AUTOMOBILE SECTOR