Tuesday, 7 July 2020

Will The Trends In Automobile Sector Continue?

Updated: November 6, 2010 2:04 pm

When it came to mergers and acquisitions (M&A) in the automotive sector in 2009, the major players continued to drive the changes necessary for the near-term restructuring of their own organisation and long-term sustainability of the industry as a whole.

                Some important questions on the sector being asked this year are: Will it follow last year’s focus on synergies, including cost saving and adding revenue to businesses or will there be a growth in small eco-friendly cars such as Nano or Reva? Or will two-wheeler majors like Hero Honda, TVS Motors, Bajaj Auto be able to grab the disposable income of the Indian consumers? Or will the economic growth of nearly 9 per cent allow the luxury cars to flourish on Indian roads?

                The auto-component makers, who actually felt the pinch of demand in the industry, are optimistic this year. Sharad Jain, Executive Director Finance, Omax Auto Ltd, said, “The auto components industry, although having a good growth potential, has its own growth challenges to maintain profitability margin, investing for future technology and meeting OEM customer demand on quality, cost and delivery. Only the companies that are able to get the game plan right would be able to survive in the long run and participate in the automotive growth numbers.”

Last year’s trend will continue

According to PwC, the automotive M&A deal value soared to USD 121.9 billion in 2009, up 286 per cent from USD 31.6 billion in 2008. The increase in deal value was influenced heavily by US treasury investment in the vehicle manufacturing sector, which occurred in response to a near collapse of the automotive industry. Now Indian companies are likely to increase their focus on growth and the traditional drivers of M&A bringing about economies of scale, acquiring technology and expanding their geographic and customer base.

Performance of Indian Auto Companies

The automobile industry in general posted strong sales number in the first half of this financial year 2010-11, though the growth rate tapered off a bit due to base effect of interest rate hike last month. The passenger vehicles segment grew at 33 per cent during the April to September period, while the commercial vehicle segment grew by 41.6 per cent. Expected performance of these leading companies in Q2 is:

                Tata Motors: Tata Motors September quarter sales are expected to go up by 29.1 per cent to Rs 27,231.9 crore, year-on-year, (YoY) basis. The company’s reported profit after tax is also expected to go up by 6914.6 per cent at Rs 1608.4 crore on YoY basis.

                Maruti Suzuki Ltd: Maruti’s Suzuki’s September 2010 volumes were above estimates, up 29.6 per cent YoY (3.1 per cent MoM) at 108,006 units driven by a 33 per cent YoY growth in domestic volumes and 10 per cent growth in exports. Volumes to 95,148 units in the domestic market driven by the newly-launched Eeco (the C segment grew by 67 per cent YoY) and the recently-launched Alto K-10 that was well received and contributed 40-45 per cent of Alto volumes.

                Industry analysts expect that domestic volume growth for Maruti Suzuki will be robust, driven by strong retail demand and the launch of Alto-K10 as well as the re-launch of Wagon-R CNG and other CNG-fitted vehicles (Alto 800, Eeco, Estilo and SX4).

                Bajaj Auto: Bajaj Auto September quarter sales are expected to go up by 47.3 per cent to Rs 4253.7 crore, YoY basis. The company’s net profit is expected to go up by 57 per cent at Rs 682.4 crore on YoY basis.

                Mahindra & Mahindra: Mahindra & Mahindra (M&M) clocked highest-ever unit sales in September, 2010. Its total sales stood at 35,177 units. On a YoY basis, domestic sales recorded a 24 per cent rise at 33,866 units from 27,431 units. For the same period, sales of its utility vehicles stood at 16,537 units vs 15,296 units.

The rise of two-wheelers

Most of the time, two-wheelers and small-user cars battle for the same spending class of consumers. India is the second largest two-wheeler market in the world and it is expected that the annual sales of motorcycles in India will cross the 10 million mark by 2010. Increased access to credit and lower-interest loans, upward migration of household income levels, fast paced urbanisation and expanding middle-class consumerism all this works in favour of the industry.

What about the luxury car makers?

The global luxury car makers are targeting India—expected to be the seventh largest by 2016. Earlier this month, Italian luxury car maker Lamborghini unveiled the limited edition of its fastest sports car Murcielago LP 670-4 SuperVeloce meant for the Indian market. Mercedes-Benz recorded sales growth of 157 per cent in the first 2 months of 2010. The company sold a total of 842 units in January and February in 2010 compared to 328 units sold in the same period last year.

Massive investment

Will the year be for the investors? Daimler, Maruti Suzuki and Mahindra and Mahaindra are set to lead an estimated USD 30 billion investments in the next four years to meet the demand in the world’s second fastest-growing market after China. According to Vishnu Mathur, director general, Society of Indian Automobile Manufacturers that automobile component industry has geared up to invest up to USD 12 billion up to the end of Automotive Mission Plan.

                The mission for development of the Indian automotive industry by the Ministry of Heavy Industries and Public Enterprises states their goal is to emerge as the world destination for the design and manufacture of automobiles and auto components with output reaching a level of USD 1.45 billion accounting for more than 10 per cent of the GDP and providing additional employment to 25 million people by 2016. FR Sanghvi, JMD, Sansera India, has a positive view, “India has a great advantage of stable economy, good prospects at increased GDP growth, which result in great construction of both rural and urban India. The government realising the need of improved infrastructure is going to increase the purchase of vehicles. We are changing from a conservative family to bold.” Pawan Ruhia, chairman, Dunlop India Limited said, “Giants such as GM and Chrysler went bankrupt, only to re-emerge as much smaller, leaner entities. The Nano became a byword for innovation and frugal engineering methods around the world today. The world auto component industry was limping, with even Delphi being broken up. It is the Asian catalyst of growth that is ruling the day; these are exciting times.”

By Samarpita Roy

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