>Four-Wheeler Industry (DBS CHOLAMANDALAM SECURITIES LIMITED)

Indian Automobile Sector
The Indian economy has grown at an annual rate of more than 8% over the last five years and the industrial production has made an outstanding contribution to this growth. Auto industry was licensed, controlled and restricted in the early years of independent India and had a limited contribution to the economy. But post delicensing in 1991 the industry has grown at an average rate of 17%. The industry currently contributes about 5% of the GDP and it is targeted to grow five fold by 2016 and account for over 10% of India’s GDP. Automotive mission plan (AMP) expects the industry to reach a turnover of $150-200 billion in the next ten years from the current $45 billion levels. Over the last five years the production of four wheelers in India has increased from 9.3 lakh units in 2002-03 to 23 lakh units in 2007-08 reporting a CAGR of 20%. Vehicle manufacturers are increasingly adopting an outward looking approach and exploring new markets & territories, ranging from Middle East, Europe, South Africa, Algeria, Latin America, Russia, etc. Exports have increased immensely from 84,000 units in 2002-03 to 280,000 units in 2007-08. Crisil estimates the passenger vehicle exports to cross 7 lakh units by 2011-12.

Commercial Vehicle Industry
The commercial vehicle (CV) Industry in India, as is the trend internationally, is cyclical, with periods of volume growth leading to investments in fleet capacity and subsequently to periods of correction. In spite of the inherent cyclical nature, the long-term growth prospects for the industry remain closely linked to the development of road infrastructure, growth in gross domestic product (GDP) and industrial production. The Indian CV industry is currently going through demand correction following one of the longest up-cycles in its history. The Industry which grew at a rate of above 25% over 2001-07 has grown by just 5% in FY08. The long up-cycle was driven by strong economic growth and investments in road infrastructure, besides favorable regulatory changes and a benign financing environment. The industry, on its part, has used its period of growth and the resulting financial surplus to invest in product development and improvement in operating efficiencies. These efforts have resulted in industry extending its presence into newer geographies and exports have increased at a CAGR of almost 40% over the last five years. Going forward this could help in mitigating the effect of down cycle to an extent.

Industry growth
Over the last five years light commercial vehicles (LCV) and medium/ heavy commercial vehicle (M/HCV) segment have grown at a CAGR of 27% and 17% respectively. Although growth of these segments has shown similar trend, volume growth in the M/HCV segment has been more volatile. The demand for M/HCV goods carrier segment mainly depends on higher capacity addition at the fleet operator level and also prone to severe demand shocks. The LCV segment, though cyclical, usually exhibits steadier demand patterns on account of wide usage range.

Structure of Indian CV segment
The CV industry in India is split between the LCV and M/HCV segments, with the classification being based on gross vehicle weight (GVW). According to Industry norms, vehicles with GVW less than 7.5 tonnes are classified as LCVs while the ones heavier than these are termed M/HCVs. In terms of usage, CVs may be categorized as goods carriers and passenger carriers. Among the passenger carriers in the less than 7.5 tonne GVW segment, those with sitting capacity up to 13 are categorized as utility vehicles (UVs, and not part of LCVs) while those with capacity over 13 passengers are grouped as LCVs. According to Crisil statistics, the overall CV industry is split between the LCV and M/HCV segments roughly in the ratio of 45:55.The Indian four-wheeler industry is duopolistic in nature with Mahindra and Mahindra (M&M) and Tata Motors holding a major share in LCV segment (90.8%) and Ashok Leyland (ALL) and Tata Motors holding a major share in M&HCV segment (88.6%).

To read the full report: FOUR WHEELER INDUSTRY