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  • 8/10/2019 CRISIL Research Cust Bulletin Sept12

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    CRISIL CRBCustomised Research Bulletin

    Sector Focus: Automobile

    KINGA MM ARKETS

    FUNCTIONBETTE

    R

    YEARS

    September2012

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    About CRISIL Limited

    About CRISIL Research

    CRISIL Privacy

    Last updated: 31 March, 2011

    Disclaimer

    CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading

    ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

    CRISIL Research is India's largest independent and integrated research house. We provide insights, opinions, and analysis on the

    Indian economy, industries, capital markets and companies. We are India's most credible provider of economy and industry

    research. Our industry research covers 70 sectors and is known for its rich insights and perspectives. Our analysis is supported by

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    CRISIL Research, a division of CRISIL Limited (CRISIL), has taken due care and caution in preparing this Report based on the information obtained

    by CRISIL from sources which i t considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data

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    subscribers / users / transmitters / distributors of this Report. CRISIL Research operates independently of, and does not have access to information

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    information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISILs Ratings Division / CRIS. No

    part of this Report may be published / reproduced in any form without CRISILs prior written approval.

    CRISIL Customised Research BulletinCRB

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    CRISIL Industry Research covers 70 industries

    Key Offerings

    Automotive

    Commodities

    Hotels & Hospitals

    Infrastructure

    Logistics

    Oil & Gas

    Power

    Real Estate

    & Others

    Key Verticals

    Industry

    Company

    Project

    Feasibility/Pre-feasibilityStudies

    Techno-economicviability studies (TEV)

    Project Vetting

    Locationidentification/assessment

    Sensitivity Analysis

    CompetitiveBenchmarking

    Valuation studies

    Evaluation of variousbusiness models

    Customised CreditReports

    Vendor Assessment

    Market Sizing

    Demand/Supply GapAnalysis

    Input/Commodity PriceForecasting

    Impact Analysis ofEconomic/RegulatoryVariables

  • 8/10/2019 CRISIL Research Cust Bulletin Sept12

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    CRISIL Customised Research

    CRISIL Research provides research inputs and conclusions to supportyour decisions while

    CRISIL Research provides you the following inputs to help youidentify/assess business opportunities or review business risks

    CRISIL Research, the leading independent and credible provider of economic, sectoral andcompany research in India, utilises its proprietary information networks, database andmethodologies to provide you customised research inputs and conclusions for businessplanning, monitoring and decision-making.

    Lending to an entity

    Taking a stake in an entity

    Transacting/partnering with an entity

    Feasibility of entry into a new business segment

    Feasibility of capacity expansion

    Choice of location, fuel, other inputs

    Choice of markets, targeted market share

    Product mix choices

    Production/sales planning

    Identification/assessment of new business themes/areas

    Building futuristic scenarios and discontinuity analysis over the long term

    Assessing the impact of changes in economic variables, commodity prices onyour business

    Field-based information on variables and tracking indicators for ongoingreview of opportunities/risks in your sectors of interest

    Assessment of credit/investment quality of your portfolio

    CRISIL Customised Research BulletinCRB

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    Foreword

    In this edition of Customised Research Bulletin, we present our viewson the

    The Opinion section presents our analysis on whether additional taxes

    on diesel Cars & UVs will help reduce petroleum subsidies. Given the

    sensitivity to significant hikes in diesel and LPG prices, the government

    is evaluating other options to manage the subsidy bill. However, CRISIL

    Research believes that this will not reduce the subsidy burden

    significantly or will be difficult to implement.

    This edition also features an interview with our sector expert, Manoj

    Mohta, DirectorCustomised Research.

    We are confident that you will find this report highly informative and

    useful.

    Prasad KoparkarSenior Director

    Industry & Customised Research

    CRISIL Research

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    Opinion

    Will additional taxes on diesel cars & UVs help reduce 01

    petroleum subsidies?

    Interview

    Mr. Manoj MohtaDirector, Customised Research 03

    Economic Overview October 2012 05

    Industry OverviewCars and UV 06

    Commercial Vehicle 08

    Two-wheeler 10

    Auto components 11

    Independent Equity Research Report

    Hero Moto Corp Ltd 13

    Customised Research Services

    Automobiles 14

    Media Coverage 15

    Contents

    CRISILCRB Customised Research Bulletin

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    1

    In the 2012-13 Union Budget, the government has set

    stringent targets to contain its subsidy bill, of which

    petroleum subsidies form a third. The options being

    considered include imposition of a one-time tax on new

    diesel cars & UVs sold or an annual usage-based levy

    on existing diesel cars and UVs, which are aimed at

    reducing the preference for these vehicles and thereby

    bringing down diesel consumption. CRISIL Research,

    however, believes these options will not bring down the

    subsidy significantly or will be difficult to implement.Furthermore, diesel cars & UVs account for just over a

    tenth of the diesel consumption. To bring about a

    sustainable reduction in the subsidy burden, the

    government had to hike diesel prices, and in future too

    it needs to ensure that diesel prices move in

    accordance with crude oil prices.

    Rs 5 hike in diesel price: A small step towardscontaining subsidy burden

    The recent Rs 5-plus hike in diesel prices has again

    turned the spotlight on petroleum subsidies, which

    account for nearly a third of the Rs 2,163 billion subsidy

    bill in 2011-12. In the Union Budget 2012-13, the

    government has targeted to contain its petroleum

    subsidy bill at Rs 436 billion, about 40 per cent lower

    than in 2011-12.

    In 2011-12, petroleum subsidies shot up by almost 80

    per cent to Rs 685 billion as crude oil prices rose and

    the rupee weakened. Within petroleum subsidies, diesel

    alone takes up about 60 per cent. Under-recoveries on

    diesel are at an all-time high of Rs 11-12 (as of

    September 2012) per litre at current diesel prices. With

    the 5-rupee hike in diesel prices, the government has

    taken a small step towards reducing the subsidy

    burden.

    Rising share of petroleum subsidies in total

    subsidies

    Note: Other major components of the subsidy bill include

    food and fertilisers

    Source: CRISIL Research

    Imposing additional taxes on cars and UVsoffer limited benefits

    Given the political compulsions that prevent major hikes

    in diesel and LPG prices, the government is evaluatingother options to discourage diesel consumption and

    reduce subsidies. The options being discussed include

    the levy of a one-time tax on all new diesel cars and

    utility vehicles (UVs) sold and collecting an annual tax

    from all diesel cars and UVs based on usage. However,

    CRISIL Research believes that these moves will not

    bring down the subsidy burden significantly or will be

    difficult to implement.

    Moreover, other vehicles like trucks and buses, which

    consume more diesel, remain untaxed. Of the total

    diesel consumed in 2011-12, cars & UVs used up only

    12 per cent, a third of what trucks and buses

    consumed. (CRISIL Research has derived the share of

    diesel use by cars & UVs, based on an estimated

    population of 3.6 million diesel cars in India as of March

    2012. This formed about 23 per cent of the total

    population of cars and utility vehicles. Of this, we have

    6%

    22%

    32%

    23%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    35%

    -

    500

    1,000

    1,500

    2,000

    2,500

    2005-06 2010-11 2011-12 2012-13B

    Other govt subsidy

    Petroleum subsidy

    Proportion of petroleum subsidy to total subsidy (%) (RHS)

    (Rs billion)

    OpinionWill additional taxes on diesel cars &

    UVs help reduce petroleum subsidies?

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    2

    CRISILCRB Customised Research Bulletin

    estimated that 47 per cent of the cars are for personal

    use, and the remainder, for commercial use.)

    Diesel consumption mix (2011-12E)

    Source: CRISIL Research

    In the following two paragraphs, we have presented our

    analysis of the options being discussed by the

    government:

    Collections from a one-time tax (estimated at Rs

    90,000-Rs 140,000 per car depending on fuel and

    vehicle use) on all new diesel cars and UVs sold would

    almost equal the subsidy borne by the government over

    the life of the vehicle. This tax would form 16-20 per

    a one-time tax would be levied on only new vehicle

    sales, the government will be able to collect only Rs 58-

    60 billion annually, which forms only 12-15 per cent of

    the total diesel subsidy bill (estimated for 2011-12).

    Secondly, as the life, mileage and distance travelled

    would be different for personal-use and commercial-use

    cars and utility vehicles; levying a common tax would be

    difficult.

    An annual usage-based taxon all diesel cars and UVs

    would, as per our estimates, amount to an additional 2

    per cent of the vehicle price annually for personal-use

    cars and 5 per cent for commercial-use cars. However,

    for collecting an annual tax, the government would have

    to rely on RTOs, which are fragmented and not so well-

    equipped. Thus, it would be difficult to collect taxes

    regularly and monitor non-payments, which renders this

    option unviable too. Moreover, Indian car and utility

    vehicle buyers already pay 26-30 per cent of the

    -20 per

    cent tax in Korea and Germany and an 8-12 per cent

    tax in Japan (excluding scrappage and carbon tax,

    which are annual in nature). Additional taxes on cars &

    UVs would, therefore, only burden consumers further.

    Deregulating diesel prices - the only long-term

    solution to cut subsidy burdenEarlier, the government has hiked diesel prices

    sparingly due to fears of high inflation, lower GDP

    growth and political compulsions; despite the logic of

    keeping diesel prices regulated, even as subsides kept

    mounting being questioned. Globally too, petrol and

    diesel prices do not vary much. In most countries within

    the EU and in the US, diesel and petrol prices are

    similar the difference between the two is not more

    than 15 per cent. By contrast, in India today, petrolprices are close to 1.4 times (as of September 2012)

    higher than diesel, reflecting both higher subsidies on

    diesel and higher taxes on petrol. (Taxes on petrol in

    India are at about 45 per cent of the selling price as

    compared to less than 20 per cent on diesel).

    CRISIL Research believes that deregulation and

    ensuring that diesel prices move in line with crude oil

    prices would be the only way to bring about a

    sustainable reduction in the subsidy burden, which will

    also provide the government funds for other

    development activities. Discouraging diesel

    consumption by imposing additional taxes on private

    and luxury diesel vehicles would only help in reduction

    of petroleum subsidies marginally.

    (Please note that the views expressed here are those of CRISIL

    operates independently of and does not have access to information

    obtained by CRISIL's Ratings Division.)

    Agriculture,

    18

    Industry,5

    Railways,3

    Others,26

    Cars & Uvs(Personal),

    7

    Cars & UVs(Commercial)

    19

    Trucksand buses,

    74

    Roads,48

    (per cent)

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    3

    Mr. Manoj Mohta, Director Customised Research,

    currently oversees a team of analysts, who cover theauto, metals, commodities, logistics sectors and nearly

    17 micro-sectors.

    Manoj played a key role in setting up the customised

    research vertical of CRISIL Research. This business

    offers focused solutions, aimed at addressing specific

    client needs, which would help them in making better

    decisions in areas of investments, planning and market

    expansion. Since its inception, the customised research

    business has grown rapidly, both in size and stature.

    Manoj has been actively involved in conceptualisation

    of three major reports of CRISIL Research -- on the

    logistics sector, the capex investment cycle of Indian

    corporates and the financial services market. He joined

    CRISIL Research in 2006, as Head- Industry Research.

    In his earlier role, Manoj was responsible for

    researching and providing opinion on various sectors

    including telecom, banking, pharma and information

    the research domain.

    Indian Institute of Technology (IIT), Roorkee and has

    done

    from the Northeastern University, Boston in the United

    States.

    How is the automobile industry expected to

    perform in the near term?

    The economic environment is weak and most

    automobile segments are seeing moderation in demand

    growth.

    In 2012-13, overall passenger vehicles would see only

    a marginal growth of 8-10 per cent due to low income

    levels, weak sentiments coupled with higher fuel and

    interest costs. However, diesel dominant segments like

    sedans and Utility vehicles will grow rapidly as they are

    gaining preference among customers due to the huge

    price difference between the petrol and diesel variants

    along with new model options.

    Also, as there is slowdown in investments, stagnancy in

    industrial production and weak agricultural production,

    we expect growth in medium and heavy goods CVs to

    decline by 1214 per cent. However, the

    underpenetrated Light CVs segment would continue its

    growth trajectory albeit at a slower pace of 14-16 per

    cent in 2012-13.

    What is the relationship between economic

    cycles and various vehicle segments of the

    Indian automobile industry?The growth in the Indian automobile industry is strongly

    linked with the growth in the economy. Hence, vehicle

    growth reacts sharply to economic cycles.

    The growth in passenger vehicles and two-wheelers is

    largely driven by factors linked to consumption factors

    of the domestic economy, while global factors have a

    relatively lesser role to play. Passenger vehicles sales

    in India is driven by income growth, cost of ownership,

    InterviewMr. Manoj Mohta

    Director, Customised Research

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    4

    CRISILCRB Customised Research Bulletin

    rising affordability and favourable income

    demographics. While rising income levels is directly

    includes cost of fuel, EMIs paid, and vehicle price is

    linked to global commodity prices (crude, metals, rubber

    etc.) and domestic policy rates.

    In contrast, the growth in commercial vehicles is driven

    by factors intrinsic to the Indian economy. The sale of

    heavy commercial vehicles is linked to increasing

    industrial and agricultural activity, while that of smaller

    vehicles is largely linked to consumption demand.

    Further, in view of the uncertainty in economic

    conditions and risk to industrial growth, we are

    witnessing volatility in the commercial vehicle sector.

    What is the position of the Indian automobile

    Industry in global markets at present?

    India is emerging as one of the fastest growing

    automobile markets globally; leading to rising

    importance of India in the growth plans of all global

    manufacturers, who are seeing stagnation in developedeconomies. While the last decade belonged to the

    global passenger vehicle entering India, this decade

    would belong to commercial vehicles.

    Although India contributes only ~4 per cent to the

    annual global passenger vehicle sales, all major global

    players, who entered the Indian market over the last

    decade, are looking at healthy volumes growth due to

    the large population base and high economic growth.

    While a decade ago, global manufacturers used to

    launch old generation products in India, with the

    increasing acceptance of international models, now

    most of the launches in the country are concurrent with

    launches world-wide.

    In contrast, global commercial vehicle manufacturers

    have either kept away or limited their presence in India

    till date. This is mainly due to the huge difference in the

    products offered by global manufacturers and the needs

    of the Indian market. The Indian truck segment focuses

    more on price rather than on safety, leading to low cost

    products with lower power, limited safety and comfort

    features. Whereas, products offered by global

    manufacturers are expensive with high end safety

    features. Going forward, we would see these gaps

    being bridged with Indian customers upgrading their

    requirements. Further, global manufacturers will

    develop products to suit the Indian markets. Over the

    next decade, we will see competition intensifying as

    international manufacturers will increase their presence

    in India.

    What challenges/concerns do you foresee for

    Indian automobile manufacturers over the next

    decade?

    The Indian automobile industry will continue to grapple

    with uncertainties on economic growth; policy actions

    on emission norms, fuel subsidy, vehicle age and fuel

    efficiency norms for some time to come. Moreover,

    Indian manufacturers would also face the heat ofcompetition. With rising competition, manufacturers

    would be forced to increase product launches which in

    turn will increase the development and marketing costs

    and consequently exert pressure on profitability.

    Further, it would become imperative to tap newer

    growth avenues such as rural India. This would mean

    developing products suitable to the needs of rural India

    with features that provide value to them. It is also a

    must to offer them at attractive prices. This would entail

    significant commitment and investment in product

    innovation and development. This is the only way to

    grow over the next decade.

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    5

    Indian EconomyEconomic Overview October 2012

    Macroeconomic Indicators - Forecast

    Inflation Industrial production growth Currency

    Sectoral inflation Trade Growth

    Interes t rates

    Foreign inflow (US$ bn) Credit growth

    Medium ThreatHigh Threat

    -8

    -4

    0

    4

    8

    Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

    Mfg

    40

    45

    50

    55

    60

    Sep-11 Jan-12 May-12 Sep-12

    Avg Rs per US$

    -40

    0

    40

    80

    Aug-11 Dec-11 Apr-12 Aug-12

    Exports Imports

    6

    7

    8

    9

    10

    Sep-11

    Nov-11

    Jan-12

    Mar-12

    May-12

    Jul-12

    Sep-12

    1 Yr 10 Yr

    -2

    2

    6

    10

    Sep-11

    Nov-11

    Jan-12

    Mar-12

    May-12

    Jul-12

    Sep-12

    FDI+ECBs Net FII flows

    0

    10

    20

    30

    Sep-10

    Jan-11

    May-11

    Sep-11

    Jan-12

    May-12

    Sep-12

    0

    10

    20

    Aug-10

    Dec-10

    Apr-11

    Aug-11

    Dec-11

    Apr-12

    Aug-12

    PrimayFuelManufacturing

    -2

    8

    18

    Aug-11 Dec-11 Apr-12 Aug-12

    WPI CPI-IW

    2012-13 Rationale

    Grow th Agriculture 0.0

    Industry 3.6

    Services 7.6

    Total 5.5

    Inflation WPI - Average 8.0

    WPI inflation forecast reflects (i) higher-than-anticipated increase in food inflation due to weak

    and delayed monsoons aff ecting food supply (ii) the impact of a weak rupee which w ill keep the

    imported component of inf lation high. Though lower GDP grow th could reduce demand-side

    pressures on inflation, other pressure points like recent revisions in prices of electricity , diesel

    and LPG w ill keep overall inflation high.

    Fiscal deficit as a % of GDP 6.2A lower GDP growth would also low er the government revenue and push the fiscal deficit to6.2 per cent of GDP. Our fiscal deficit forecast does not take into account any substantial

    stimulus that may be given to the economy to boost grow th.

    Interest rate10- year G-Sec

    (year end)8.0-8.2

    Given the high fiscal deficit, government borrow ing in 2012-13 w ill remain high. As a result, the

    pressure on the 10-year G-sec yield would continue and we expect the yield to settle around

    8.0-8.2 per cent by March-end 2013. This assumes a further repo rate cut of around 50 bps by

    the RBI during the rest of the fiscal year.

    Exchange

    rate

    Re/US $

    (year end)53.0

    Despite the recent appreciation, the rupee is expected to settle around 53 per US$ by March-

    2013 due to a weak global and domestic grow th outlook. How ever, recent policy measures

    such as relaxation of FDI limits has increased capital inflow s and creates an upside bias to our

    currency forecast.

    The grow th forecast takes into account tw o key risks: (i) delayed monsoons affecting

    agricultural growth (ii) recession in Euro zone. Though monsoons recovered significantly inAugust, the sowing of kharif foodgrain is still down by around 10 per cent compared to the last

    year. A deepening recession in the Eurozone w ill impact India's manufacturing as w ell service

    sector such as IT/ITES via export-linkages. Our forecasts do not account for any substantial

    fiscal stimulus given the limited legroom available to do so. There could be some upside to the

    grow th forecast if the government speeds up project clearances and restores expansion of

    mining output.

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    6

    CRISILCRB Customised Research Bulletin

    Industry Overview Cars and UV

    Car sales to witness another year of lowgrowth

    Domestic Cars and UV sales grew by 4.7 per cent in

    2011-12, of which, car sales grew by a mere 2.2 per

    cent, weighed down by the increase in fuel prices and

    interest rates. Production troubles at Maruti Suzuki

    India Ltd (MSIL), caused by labour strikes, hampered

    sales further. MSIL accounted for 36 per cent of the

    total production in 2011-12 as against 43 per cent in

    2010-11. The UV segment grew by a healthy 14 percent in 2011-12 even as domestic car sales registered a

    modest growth due to higher sales of new models and

    models with higher diesel engine capacities.

    Of the existing demand, there was a huge shift towards

    diesel cars, as the gap between the prices of petrol and

    diesel widened. However, carmakers were unable to

    address this sudden spurt in demand as availability of

    diesel engines was limited. This, in turn, impactedgrowth in sales. OEMs also had to deal with a rising

    inventory of petrol models despite offering huge

    discounts on them.

    Domestic sales: Utility vehicles (including vans)

    Source: SIAM, CRISIL Research

    Domestic cars, UV sales to record slow growthin 2012-13

    CRISIL Research expects 8-10 per cent growth in the

    passenger vehicles segment, with utility vehicles

    growing by 19-21 per cent versus a 5-7 per cent growth

    in cars. Within cars, we expect lower sensitivity to

    interest rates coupled with higher availability of diesel

    models to lead to a double-digit growth in sedan sales.

    However, small car sales are likely to grow by a modest

    2-4 per cent. Going ahead, production woes at Maruti's

    Manesar plant and fuel prices remain key monitorables.

    Production troubles to impact growth

    Domestic car sales grew by a mere 2 per cent in 2011-

    12 due to production troubles at MSIL in addition to a

    sharp increase in petrol prices and auto lending rates.

    Hence, in 2012-13, we had projected growth to revive

    on account of last year's low base. However, a lockout

    at MSIL's Manesar plant in July 2012 is expected tolead to lower growth. MSIL's Manesar plant produces

    the new Swift, Dzire, Ritz, A-Star and SX4, which

    constituted nearly 25 per cent of total domestic sales in

    Q1 2012-13. These models recorded a growth of more

    than 50 per cent in the first quarter of 2012-13, while

    the industry grew by 5 per cent during the period.

    Hence, unavailability of these models will have a

    significant impact on demand.

    Exports to grow by 12-14 per cent in 2012-13

    Exports of cars & utility vehicles (UVs) are expected to

    grow by 12-14 per cent in 2012-13 after rising by 14 per

    cent in 2011-12. Last year, new entrants like Nissan

    and Ford led the growth, as exports of their small-car

    models surged. On the contrary, exports by Maruti

    Suzuki India Limited (MSIL), the country's second-

    largest exporter, declined by 7.9 per cent, as production

    suffered in line with strikes at its key plants. This pulled

    344 332 423 530 602

    13.6%

    -3.7%

    27.4%25.3%

    13.6%

    -10%

    -5%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    0

    100

    200

    300

    400

    500

    600

    700

    2007-08 2008-09 2009-10 2010-11 2011-12

    Thous

    ands

    Utility vehicles Growth (%)

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    7

    down the carmaker's share in total exports to 25 per

    cent in 2011-12 from 33 per cent in 2009-10. Others like

    Hyundai Motors India Limited (HMIL) also increased

    focus on export markets to compensate for slow

    domestic demand.

    OEMs other than current leading exporters will rapidly

    gain share in total exports from the country. In the long

    term, forays into markets other than Europe will drive

    exports. Additionally, export-focused capacity additions

    by players such as Renault-Nissan, Ford and Maruti

    Suzuki will also aid growth, over the long term.

    Cars & UV Exports

    Source: SIAM, CRISIL Research

    6%

    9%

    55%

    33%

    0%

    14%

    -10%

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    0

    100

    200

    300

    400

    500

    600

    2006-07

    2007-08

    2008-09

    2009-10

    2010-11

    2011-12

    Thousands

    Export volumes Growth (%)

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    9

    replacement demand and substitution of small-three-

    wheelers to an extent. We expect replacement demand

    for sub-one tonne vehicles, which were sold since

    2005-06, to set in over this period. Similarly, though the

    substitution effect from large three-wheelers will fade,

    aggressive marketing of 0.5-tonne payload SCVs will

    substitute small-three wheelers to an extent, aiding LCV

    sales.

    CRISIL Research thus expects LCV sales to post a 14-

    16 per cent CAGR during 2011-12 to 2016-17, led by a

    15-17 per cent CAGR in SCV sales. The growth

    potential of the Indian LCV market remains huge ascompared to global peers such as China. Our study

    reveals that as of 2011-

    significant scope for volume growth in the Indian LCV

    market over the next 5-

    ratio is expected to improve to 1.25 times by 2016-17.

    Further, a comparison of LCV penetration across Indian

    states in our study - - -

    revealed that there is a huge volume growth potential.

    CRISIL Research also found that factors like: size of

    state GDP, private consumption expenditure, urban

    population and MHCV population are the key factors

    determining the potential for SCVs in a state.

    Southern states account for a third of LCV sales

    Source: Industry, CRISIL Research

    Volume growth potential makes Indian LCVmarket attractive, even as competitionintensifies

    As the potential is immense, more players are expected

    to enter the Indian LCV market in the coming years,

    intensifying competition further. For instance, Mahindra

    -11,

    is already estimated to have over 10 per cent market

    share. The Maxximo addressed the need for higher-

    powered SCVs. Ashok-

    combines features of both mini-trucks and pick-ups, has

    also gained over 5 per cent share. For example,

    Chinese truck makers Beiqi Foton and GM-SAIC are

    expected to launch models from their famous Forland

    and Wuling ranges. As a result, players will have to

    constantly innovate and offer value-for-money to stay

    competitive. Nevertheless, the volume growth potential

    of the Indian LCV market will ensure that most players

    will stay in for the long haul.

    33-37% 31-35%

    28-32% 30-34%

    18-22% 18-22%

    13-17% 13-17%

    2008-09 2011-12

    South Zone West Zone North Zone East Zone

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    CRISILCRB Customised Research Bulletin

    Industry Overview Two-wheeler

    Weakening macro-economic cues to weigh

    down growth during 2012-13

    The domestic two-wheeler industry grew by 27 per cent

    in 2010-11 y-o-y, with domestic volumes rising by 26

    per cent and exports by 35 per cent. In 2011-12, while

    rural demand remained buoyant, urban motorcycle

    demand decelerated. Consequently, domestic two-

    wheeler sales growth moderated to 14.1 per cent during

    the year. Exports growth remained significantly higher

    during 2011-12 at 27 per cent.

    In 2012-13, domestic sales are forecast to grow by just

    5-7 per cent. Deficient and delayed rainfall in major

    Indian states is likely to hit rural incomes, and, in turn,

    affect demand for motorcycles and mopeds, categories

    that account for over 80 per cent of two-wheeler sales.

    Exports remained strong in 2011-12 despiteDEPB withdrawal

    Two-wheeler exports grew at a robust pace of 27.1 per

    cent in 2011-12 (after a strong 35 per cent growth in

    2010-11) due to healthy growth in target markets, better

    products and the increasing distribution reach of Indian

    players. During the year, Bajaj Auto Ltd was the

    growing by 30.4 per cent y-o-y. TVS Motors Ltd, the

    second largest exporter, posted a 14.6 per cent y-o-y

    exports growth. Amongst newer players, the exports of

    India Yamaha Motors grew by over 45 per cent y-o-y

    This sharp increase in two-wheeler exports is despite

    the withdrawal of the Duty Entitlement Passbook

    (DEPB) Scheme in September 2011, under which

    around 9 per cent of free-on-board (FoB) value of

    exported two-wheelers was reimbursed to exporters as

    duty credit in the form of tradable scrips. The DEPB

    scheme has been replaced with a Duty Drawback

    Scheme (effective since October 2011), offering 5.5 per

    cent incentive on FoB value with an additional 1 per

    cent special incentive for exports in 2011-12. Moreover,

    a Special Focus Market scheme (wherein 3.5 per cent

    benefit is made available to exports destined for certain

    distant markets) was expanded to include 41 new

    countries. Important existing and emerging markets

    such as Angola and several other African countries,

    Colombia, Mexico and Peru are covered under the

    scheme.

    Thus, for most major export markets, the level of

    incentives available remains largely unchanged in the

    post-DEPB era with the major exceptions of Nigeria, Sri

    Lanka and Bangladesh. However, exporters were also

    able to pass-through 2.0-2.5 per cent price hikes post-

    September 2011 in all major export markets and thus

    make up for reduced incentives without a significantdent on volumes. For the period April-September 2011,

    exports grew by 32 per cent y-o-y whereas growth for

    October-December 2011 was at 22 per cent y-o-y,

    clearly showing continued healthy growth.

    Two-wheeler exports

    Source: SIAM, CRISIL Research

    21%

    32%

    22%

    14%

    34%

    27%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    35%

    40%

    0

    500

    1000

    1500

    2000

    2500

    2006-07

    2007-08

    2008-09

    2009-10

    2010-11

    2011-12

    Thousands

    Export Volumes Growth (%)

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    11

    Industry Overview Auto components

    Weak demand from OEMs drags domestic autocomponent growth in 2011-12

    In 2011-12, domestic auto component production

    growth slowed to 15 per cent y-o-y after posting a

    strong growth the year before, reflecting a slower

    demand from the OEM segment (70 per cent of

    component demand), as cars & utility vehicle (UV) sales

    grew in single digits. Growth in other end-user

    segments, such as commercial vehicles also

    moderated. Slowing car production also restricted the

    growth in realisations for component manufacturers.

    In 2010-11, growth was better, with auto component

    production estimated to have risen to 28 per cent y-o-y,

    driven by a sharp recovery in domestic automobile

    production after slowing in 2007-08 and 2008-09.

    Slowing OEM demand to weigh downcomponent production growth

    CRISIL Research expects the Indian auto components

    industry to grow at 12-14 per cent y-o-y to reach Rs 2.4

    trillion in 2012-13. Growth would however be lower than

    in the past years, as commercial vehicle (CV)

    manufacturers, who contribute to a fifth of the total

    domestic component demand, report a slow growth.

    The long-term picture remains bright, with the industry

    expected to record a 15-17 per cent CAGR to reach Rs

    4.5 trillion by 2016-17.

    Component exports continued to gainmomentum in 2011-12

    In sharp contrast to the domestic scene, auto

    component exports is estimated to have continued to

    remain robust in 2011-12, growing by 25-27 per cent in

    value terms, after having grown by 28 per cent in 2010-

    11. A recovery in key markets, growing penetration of

    Indian auto component manufacturers and the trend of

    increased sourcing by global OEMs from low-cost

    countries boosted exports.

    The EU and the US accounted for about 65 per cent of

    auto component exports in 2011-12. Sales of cars and

    light trucks, which are the major target segments for

    Indian auto component players, continued to grow at 13

    per cent during the year, after growing by 11 per cent in

    2011 in US. However, in the EU, car registrations

    continued to slide by 2 per cent in 2011, as

    governments in the region withdrew incentives like

    scrappage benefits on small cars. The EU commercial

    vehicles market (a major target segment for Indian auto

    component exporters), however, continued to be strong,

    growing by 13 per cent in 2011.

    Trend in yearly export growth of auto components

    Source: CRISIL Research, ACMA

    Increased penetration, expected recovery inkey markets to lead to strong growth inexports

    Auto component exports have grown rapidly over the

    last decade. The share of exports in total auto

    component production increased to 14 per cent in 2010-

    11 from 8 per cent in 1999-2000. This is because,

    globally, there has been a shift in auto component

    sourcing towards low-cost countries (LCCs). Also, while

    34

    16

    19

    20

    34

    44

    -3

    33

    59

    30

    44

    19

    9

    19

    7

    28

    1995-96

    1996-97

    1997-98

    1998-99

    1999-00

    2000-01

    2001-02

    2002-03

    2003-04

    2004-05

    2005-06

    2006-07

    2007-08

    2008-09

    2009-10

    2010-11

    (per cent)

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    12

    CRISILCRB Customised Research Bulletin

    India exported around 35 per cent of its total auto

    component exports to OEMs or Tier-I suppliers in 2000,

    supplies to original equipment manufacturers (OEMs)

    and Tier I vendors was pegged at 80 per cent as of

    2010. This indicates that there is increasing

    dependence of global players on Indian component

    manufacturers. Hence, auto component export volumes

    from India will continue to grow.

    Exports are expected to post a CAGR of 22-24 per cent

    till 2016-17 as exports to target markets increase,

    supported by a growth in outsourcing requirements of

    global automobile manufacturers.

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    14

    CRISILCRB Customised Research Bulletin

    Customised Research Services Automobiles

    Coverage

    Key Offerings

    Forecasting

    Automobile forecasting/statistical tool development services

    Short term demand and supply forecasts based on econometric models

    Medium-to-long term demand and supply forecasts model for strategic planning activities

    Market entry strategy and business planning support

    Market assessment and outlook of auto components and tyre business in India

    Demand potential for alternative fuel vehicles

    Commodity prices for key raw materials like metals, rubber and polymer

    Market dynamics

    Market size, characteristics, structure, dynamics and profitability of the used vehicle segments

    Competitive benchmarking studies based on:

    Product portfolio, distribution network and marketing strategies for new and existing products

    Supply chain and sourcing strategy of OEMs

    Financial parameters, growth trends, export potential etc of industries/companies

    Cost-structure and operational efficiency of an OEM vis--vis other OEMs

    Impact analysis of developments concerning auto fuels, economic indicators and raw material prices

    Financing options

    Benchmarking of independent auto financiers with their competitors

    Financial assessment of vendors

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    15

    Media Coverage

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    Our Capabilities

    Economy and Industry Research

    Funds and Fixed Income Research

    Largest and most comprehensive database on Indias debt market, covering more than 14,000securities

    Largest provider of fixed income valuations in India

    Value more than Rs.33 trillion (USD 650 billion) of Indian debt securities, comprising 85 per cent ofoutstanding securities

    Sole provider of fixed income and hybrid indices to mutual funds and insurance companies; we maintain12 standard indices and over 80 customised indices

    Ranking of Indian mutual fund schemes covering 73 per cent of assets under management andRs.5 trillion (USD100 billion) by value

    Retained by Indias Employees Provident Fund Organisation, the worlds largest retirement schemecovering over 50 million individuals, for selecting fund managers and monitoring their performance

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    Largest independent equity research house in India, focusing on small and mid-cap companies;

    coverage exceeds 100 companies Released company reports on all 1,401 companies listed and traded on the National Stock Exchange; a

    global first for any stock exchange

    First research house to release exchange-commissioned equity research reports in India

    Assigned the first IPO grade in India

    Largest team of economy and industry research analysts in India

    Coverage on 70 industries and 139 sub-sectors; provide growth forecasts, profitability analysis,emerging trends, expected investments, industry structure and regulatory frameworks

    90 per cent of Indias commercial banks use our industry research for credit decisions

    Special coverage on key growth sectors including real estate, infrastructure, logistics, and financialservices

    Inputs to Indias leading corporates in market sizing, demand forecasting, and project feasibility

    Published the first India-focused report on Ultra High Net-worth Individuals All opinions and forecasts reviewed by a highly qualified panel with over 200 years of cumulative

    experience

    Making Markets Function Better

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    CRISIL Ltd is a Standard & Poor's company

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