Wednesday, September 22, 2010

>MOTOGAZE: What seasonality? Demand grows unabated…

No signs of demand slowdown
The Indian automotive industry is witnessing a trend of volume growth, which has been defying all seasonality trends of the past. This is reflecting the structural change in consumer patterns driven by the strong economic performance adding strength to the income levels of the urban as well as rural customers. The volume growth of the industry till date has been around 26% with the passenger car segment growing ~34% and commercial vehicle (CV) segment growing at ~45% leading the way. The robust growth across the segment has led to demand surpassing supply in all major segments with suppliers facing acute capacity shortages. The surprising and heartening trend can be ascertained from the fact that despite the OEMs having raised prices in response to higher commodity prices and newer emission norms, demand growth has not been deterred.

Supply side shortages limit growth ceiling
Auto OEMs have seen a loss of probable sales due to supply related
slippages in castings, bearing, fuel injection pumps, etc. Ancillary
manufacturers have undertaken the process of capacity expansion, which
would come on stream by the second half of next fiscal. Pre-festive
purchases have been high in anticipation of a demand outburst in the
coming months, which would lead to further shortages of supply. The
OEMs have tried to increase dealer inventory to face these issues though
this has not been very fruitful due to continuous demand.

Raw material prices easing
Rubber prices have seen a decline from their earlier higher levels beyond
` 85/kg to ` 165/kg since the festive season of Onam in Kerala that saw
increased supply of natural rubber reducing the price arbitrage between
domestic prices and international prices (Bangkok prices). The tyre
industry would get some respite. This is due to the change in the existing
inverted duty structure in which the finished tyre attracts half the duty at
~10% in comparison to natural rubber, which is a raw material. This
would further help in maintaining price balances between domestic and
international markets. Aluminium prices, on the other hand, have seen a
hardening of ~6.5% since Q1FY11, thereby providing another possible
cause for concern in the coming quarters for OEMs.

Industry outlook
The consistent performance till now has raised expectations regarding
volume growth possibilities during the coming months of the festive
season, which is expected to be the strongest for the industry. The
industry is expected to grow at a CAGR of 13-15% in FY10-12E aided by
boisterous economic activity, favourable demographics and higher
income levels. The major concerns would be raw material prices, capacity
constraints and any untoward interest rate movement that could lead to a
reduction in profitability in spite of such volume growth. With the industry
lining up new capacities and anticipating future growth possibilities to
meet the stronger demand scenario of the domestic market, the outlook
continues to remain bright.

To read the full report: MOTOGAZE