Description
The automotive industry is a term that covers a wide range of companies and organisations involved in the design, development, manufacture, marketing, and selling of motor vehicles, towed vehicles, motorcycles and mopeds. It is one of the world's most important economic sectors by revenue.
GRAND PROJECT ON FUNDAMENTAL ANALYSIS FOR SECURITY SELECTION IN AUTOMOBILE SECTOR
AESPGIBM GUJARAT UNIVERSITY (2006-08)
BY : JIGISHA P. AAGJA
CERTIFICATE
This is to certify that Ms. Jigisha P. Aagja has successfully completed her Grand Project titled “Fundamental Analysis for security selection in Automobiles sector” under the guidance of Prof. Falguni Pandya for the partial fulfillment of the M.B.A. program (batch 2006-2008) from AES Post Graduate Institute of Business Management, Gujarat University.
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Executive Director Dr. A. H. Kalro
Project guide Prof. Falguni Pandya
Date: Place: Ahmedabad
ACKNOWLEDGEMENT
I am thankful to God for successfully completing this project study.It was a good experience. I thank Dr A H Kalro (executive director) for providing the opportuinity as well as the support facilities for the project study.I also thank Dr. Parag Sanghani and Prof Taral pathak for their guidance.The assistance and support of my guide, Prof. Falguni Pandya is worth appreciating.
I am happy to have a supportive family to encourage me .
The study was based on secondary data.The tools used were EIC framework ( Econmy- Indutry-Company analysis ),Free cash flow method of discounting to determine the intrinsic value of the security.
TABLE OF CONTENTS
TOPIC
PAGE NO. ii iii iv
Certificate Acknowledgement Executive Summary
Chapter 1 1.1 Introduction 1.2 Global Economy –Part One 1.2.1 Developments during 2006 1.2.2 developments during 2007 1.3 Indian Economy – Part Two 1.3.1 Macroeconomic Indicators 1.3.2 Sectoral Contribution 10 13 2 6 1
Chapter 2 2.1 India’s Position 2.2 Background of automobile sector 2.3 Pull & Push Effect 2.4 Auto Units and regional clusters 2.5 SWOT Analysis 25 27 30 32 47
TOPIC
PAGE NO. 53 68
2.6 Porter’s Diamond Model 2.7 Highlights of Union Budget
Chapter 3 Company Analysis 3.1 Introduction 3.2 Tata Motors 3.2.1 Company Information 3.2.2 Company valuation 3.3 Ashok Leyland Limited 3.3.1 Company Information 3.3.2 Company valuation 3.4 Key Assumptions and bases for valuation 3.5 Recommendations and limitations 95 96 106 107 84 85 81
Appendices References
108 111
CHAPTER 1
INTRODUCTION
SECURITY ANALYSIS Analysis of a security can be done chiefly by two ways. They are fundamental analysis and technical analysis. Fundamental Analysis It is concerned with the fundamentals affecting a security. It is based on the premise that the share should be purchased when it is available below its intrinsic value and sell when when its market price rises beyond it intrinsic value. It holds that in the short run the market price deviates from the inrinsic value of the share but in the long run both will be equal. Technical analysis It is a charting technique used to trade in securities.It seks to amswer questions as the trend in price and likelihood of a reversal.
Various models used in fundamental analysis are dividend models ,ratio analysis , discounted cash flow approach. Fundamental analysis through EIC (Economy –Industry –Company ) approach begins with the study of the macro economy.
MACROECONOMY
PART ONE : GLOBAL ECONOMY
The world economy is divided into advanced economies, emerging and developing economies and underdeveloped economy.
Developments during 2006
Growth at the global level The global economy continued on high growth path with a 5.4 per cent growth during 2006 achieving a four year spell of a sustained growth of over 4 per cent that began in 2003.The broad-based expansion in world output could be explained in terms of a resilient US consumption, despite some slowdown in growth in the second half of the year, a broad-based upswing in Europe and Japan and other advanced industrial countries, and continued rapid growth in emerging market economies (EMEs) particularly, China (11.1 per cent), India (9.4 percent) and Russia (6.7 per cent).
The growth in the world output was led by emerging economies which contributed 3.9 per cent to the world GDP growth in 2006, while the advanced economies contributed 1.5 per cent. Growth in the euro area exceeded that in the United States in the second half of last year, for the first time since 2002. In the EMEs, growth continued to remain firm on account of availability of financial resources, strong commodity prices and abundant global liquidity. Concerns have, however, arisen regarding the sustainability of some of these factors. Economic activity in Japan slowed in the middle of 2006, but recovered by the end of the year.
Inflation As output in many countries seemed close to potential, strong demand, in conjunction with strong gains recorded by global commodity prices, was reflected in some inflationary pressures in major economies. Global headline inflation closely tracked movements in energy prices –rising above 3 per cent in the first half of 2006 on the back of rising oil prices, before dropping sharply as energy prices declined towards the end of the year. The consumer price inflation in advanced economies was 2.3 per cent in the calendar year 2006, the same as a year earlier, but higher than that of 1.9 per cent during the preceding 5-year period (2000-04). Inflation in ‘developing Asia’ rose from 2.6 per cent during 2000-04 and 3.6 per cent in 2005 to 4.0 per cent in 2006.
Tightening of monetary policy With headline inflation crossing the targets / comfort zones in major countries, many central banks pursued monetary tightening to contain inflationary expectations. Amongst the major advanced economies those that tightened their policies were – the US Federal Reserve Board (US Fed) the European Central Bank (ECB) the Bank of England, the Sveriges Riksbank (Sweden) the Reserve Bank of New Zealand the Reserve Bank of Australia & the Bank of Japan. Fiscal balances Fiscal balances in advanced industrial countries showed signs of improvement in 2006.Measures of structural budget deficits, which attempt to remove cyclical effects from headline deficit figures, declined as follows : United States - by over 1 percentage point of potential GDP Germany Japan - by 0.8 percentage points - by 0.5 percentage points, (largely due to one-off
Changes in capital transfers) & Italy - marginally increased
Change in German headline balances was even more pronounced, with the deficit decreasing by 1.8 percentage points in 2006. Credit While the credit conditions turned tight in the United States, the expansion has continued in most other areas. As a result, global asset prices either continued to rise or were maintained at unusually high levels. Most Asian EMEs have recorded strong growth with reasonably well anchored inflation expectations aided by strong global demand for their exports favourable terms of trade easy access to external financing comfortable foreign currency reserves along with reduced external debt as percent of GDP.
Banking systems of EMEs Their banking systems have also been strengthened through improved restructuring and supervisory systems. The resilience to external shocks is reinforced by a combination of the following –
lower balance sheet exposure to exchange rate risks lower refinancing risks in debt structures, strong financial systems and greater policy flexibility But there are areas of concern and many of these countries have felt the need for containing excess volatility in foreign exchange markets through intervention accompanied by sterilisation. But, such policies have their own limitations and such
actions have also been accompanied by differing strategies for liquidity management including – raising cash reserve requirements, issuances of central bank securities, ceilings on lending to specific sectors and the use of prudential tools. International Financial markets In international financial markets, prices of risky assets continued to rise throughout most of 2006 and early 2007. A number of equity markets reached historical highs, while various credit spreads touched new lows. Government bond yields In the advanced industrial countries such yields leveled off around mid-2006 and then began to move downwards. Long term bond yields particularly in the United States, set on a downward trend during the second half of the year, reflecting investor concerns about US growth prospects and expectations of easing monetary policy. Japan & Europe The economic outlook in Japan remained more positive, lending some support to bond yields, while the economic outlook for the euro area brightened progressively and eventually brought about rising euro bond yields. Equity & credit markets An important factor behind the gains in developed equity and credit markets was continued strong earnings growth. Also, ongoing changes in capital structure boosted equity markets, as share buybacks rose further , while merger and acquisition activity grew substantially. Similarly, gains in emerging markets coincided with improved credit ratings and genereraly strong macroeconomic conditions.
Performance of financial firms The strong overall performance of financial firms in advanced industrial countries continued during the year, and banks benefited from another year of a generally benign credit environment and strong retail business. Investment banks registered record profits driven by growth in capital market activity and a boom in private equity. Investor inflows into hedge funds were moderate as compared with the previous years, in response to the declining rates of return registered by the funds. Current profits add to already healthy capital cushions, suggesting that financial firms are well placed to withstand the likely sources of strain over the near term.
Developments during 2007
GDP growth rate World GDP growth, which had accelerated to 5.4 per cent in 2006, maintained pace in the first half of 2007 and appears to have broadened across industrial and emerging market countries.According to the World Economic Outlook (WEO) of the International Monetary Fund (IMF) released in October 2007, global real GDP growth was expected to decline from 5.4 per cent in 2006 to 5.2 per cent in 2007 and further to 4.8 per cent in 2008. Although growth in the United States slowed in the first quarter of 2007, preliminary estimates suggest that it rebounded in the second and third quarters. Activity in most othercountries continued to expand strongly. In the euro area and Japan, growth has remained above trend with some welcome signs that domestic demand is taking a more central role in the expansions. Emerging market countries have continued to expand robustly, led by rapid growth in China, India and Russia.
Inflation Headline inflation in major advanced economies generally edged up towards the end of the third quarter of 2007, mainly reflecting hardening of food and fuel prices in the US, and clothing and education in the euro area.
On the other hand, headline inflation in the UK eased towards the end of third quarter largely due to lower domestic energy price inflation before picking up again in October 2007. Amongst major economies, headline inflation in October 2007 was 3.5 per cent in the US, 2.1 per cent in the UK and 2.6 per cent in the euro area. Inflation was 2.2 per cent in the OECD countries in September 2007 as compared with 2.0 per cent a year ago.Core inflation remained firm in major economies, reflecting strong demand conditions.
Global credit markets Global credit markets have experienced large volatility since May 2007 as uncertainties about the size and distribution of losses from the US sub-prime mortgage lending made investors to adjust their positions. Since late 2006 , conditions in the sub-prime mortgage market sector in the US have deterio-rated significantly resulting in reassessment of risk by investors across products and markets. The losses, thoughlargely concentrated in the US, were dispersed quickly to European and Asian investors holding asset backed securities and collateralised debt obligations. Within Asia, exposure was reported to be concentrated in Japan, China, Taiwan Province of China, South Korea and Australia.
Short-term rates Hardened Short-term rates hardened further in a number of economies, moving broadly in tandem with policy rates. Several central banks such as the Bank of England, People’s Bank of China, Reserve Bank of New Zealand raised their policy rates further during the quarter ended September 2007 to contain inflation and stabilise inflationary expectations. Softened On the other hand, short-term interest rates in the US declined, reflecting cut in the fed funds target rate by 75 basis points to 4.5 per cent by October 31, 2007. The rate cut in the US on September 18, 2007 was the first after a series of 17 consecutive rate hikes by
the Federal Reserve that commenced from June 2004 to June 2006 followed by a pause up to August 2007. Short term rates eased in a few EMEs such as Brazil and Thailand, as central banks in these countries continued to cut policy rates to support growth.
Long-term Government bond yields In contrast to short-term interest rates, long-term Government bond yields softened in major advanced economies during the second quarter of 2007-08, reversing the increasing trend observed in the first quarter. Decline in the bond yields reflected lower investor appetite for riskier assets in the event of deteriorating housing market and turmoil in the credit market. Between end- March 2007 and November 19, 2007, 10-year yield declined by 35 basis points in the US, and 17 basis points in UK and 15 basis points in Japan, while it increased by 11 basis points in the Euro area.
Global Equity Markets Global equity markets recorded further gains during Q3 2007, amidst intermittent corrections. Robust corporate earnings, buoyant merger and acquisition activity and increased risk appetite buoyed the equity markets in major emerging economies such as China (69.8 percent ) Hong Kong (30.7 per cent) Indonesia (28.5percent) Thailand (21.3 per cent) However, factors like slump in the US home sales and rising concerns about the US mortgage and corporate lending markets, increase in international crude oil prices, surge in China’s inflation rate and contraction in Japan’s economy intermittently dampened the market sentiment. South Korea (32.2 per cent) Brazil (28.7 percent) Turkey (25.1 per cent)
Foreign Exchange US In the foreign exchange market, the US dollar depreciated against major currencies upto September 14, 2007, reflecting worries in the mortgage market, falling housing sales and weakening consumer confidence. While the pound sterling strengthened against the US dollar and reached a 25-year high level in July 2007, Japanese yen appreciated against US dollar as a result of unwinding of yen carry trade.
PART 2: INDIAN ECONOMY Macro Economic indicators GDP The Indian economy continued to record strong growth during 2006-07. Real gross domestic product (GDP) growth rate accelerated to 9.4 per cent during 2006-07 from 9.0 per cent level in the previous year contributed mainly by the sustained expansion in industry and services. Real GDP growth during the Tenth Plan period (2002-03 and 2006-07) averaged 7.6 per cent – the highest average rate of growth during any plan period so far. Projected GDP growth rate : GDP at current market prices is projected at Rs. 46,93,602 crore in 2007-08 by the Central Statistical Organisation (CSO) in its advance estimates (AE) of Gross Domestic Product. In the current fiscal year, the size of the Indian economy at market exchange rate will cross US$ 1 trillion at the nominal exchange rate (average of April-December 2007) GDP is Projected to be US$ 1.16 trillion in 2007-08. The economy has moved to a higher growth plane, with growth in GDP at market prices exceeding 8 per cent in every year since 2003-04. The projected economic growth of 8.7 per cent for 2007- 08 is fully in line with this trend. There was an acceleration in domestic investment and saving rates to drive growth and provide the resources for meeting the 9 per cent (average) growth target of the Eleventh Five-Year Plan. Macroeconomic fundamentals continue to inspire confidence and the investment climate is full of optimism. Buoyant growth of government revenues made it possible to maintain
fiscal consolidation as mandated under the Fiscal Responsibility and Budget Management Act (FRBMA). The decisive change in growth trend also means that the economy was not fully prepared for the different set of challenges that accompany fast growth.
Inflation flared up in the last half of 2006-07 and was successfully contained during the current year, despite a global hardening of commodity prices and an upsurge in capital inflows. Raising growth to double digit will require additional reforms, because of the following concern areas : An appreciation of the rupee A slowdown in the consumer goods segment of industry The infrastructure (both physical and social) constraints
Per capita Income & Per capita consumption ( at constant prices1900-2000) - an indicator of public welfare The pace of economic improvement has moved up considerably during the last five years (including 2007-08). Per capita income Period of 1980-81 to 91- 92 : The rate of growth of per capita income as measured by per capita GDP at market prices (constant 1999-2000 prices) grew by an annual average rate of 3.1 per cent during the 12year period, 1980-81 to 1991-92.
Period of 1992-93 to 2002-03 : It accelerated marginally to 3.7 per cent per annum during the next 11 years, 1992-93 to 2002-03. Since then there has been a sharp acceleration in the growth of per capita income, almost doubling to an average of 7.2 per cent per annum (2003-04 to 2007-08). This means that average income would now double in a decade, within one generation, instead of after a generation (two decades). Projected growth rate in per capita GDP for 2008-09 : The growth rate of per capita income in 2007-08 is projected to be 7.2 per cent, the same as the average of the five years to the current year. Per capita income at nominal exchange rate is estimated at US$ 1,021 India – in low income category : According to the World Bank system of classification of countries as low income, middle income and high income, India is still in the category of low income countries.
Per capita consumption Per capita private final consumption expenditure has increased in line with per capita income. Period of 1980-81 to 1991-92 & 1992- 93 to 2002-03 : The growth of per capita consumption accelerated from an average of 2.2 per cent per year during the 12 years from 1980-81 to 1991-92 to 2.6 per cent per year during the next 11 years following the reforms of the 1990s. The growth rate has almost doubled to 5.1 per cent per year during the subsequent five years from 2003-04 to2007-08. Projected growth rate for 2007-08 : The current year (2007 -08) growth is expected to be 5.3 per cent, marginally higher than the last five year average.
Consumption & saving – comparative rates : The average growth of consumption is slower than the average growth of income, primarily because of rising saving rates, though rising tax collection rates can also widen the gap (during some periods). Year to year changes in consumption also suggest that the rise in consumption is a more gradual and steady process, as any sharp changes in income tend to get adjusted in the saving rate. Sectoral Contribution The deceleration of growth in 2007-08 is generally spread across most of the sectors except Electricity Community services and The composite category -“trade, hotels, transport & communications”
The deceleration in the growth of the agriculture sector is attributed to the slackening in the growth of rabi crops. Manufacturing and construction , which grew at 12 per cent in 2006-07, decelerated by about 2.5 percentage points in 2007-08. The slower growth of consumer durable was the most important factor in the slowdown of manufacturing. Cement and steel, the key inputs into construction, grew by 7.4 per cent and 6.5 per cent respectively, during April-November 2007-08, down from 10.8 per cent and 11.2 per cent in the previous year, dampening the growth in the construction sector. There was also a deceleration in the growth of revenue earning freight traffic by railways, passengers handled at airports, and bank credit in April-November 2007-08, which formed the basis for the full year assessment.
The average growth of manufacturing during the five years ending 2007-08 is expected to be about 9.1 per cent. Manufacturing Sector Agriculture & allied activities Real GDP originating from agriculture and allied activities estimated by the Central Statistical Organisation (CSO) registered a lower growth of 2.7 per cent during 2006-07 than that of 6.0 per cent in the previous year. Industry The growth of real GDP originating from industry entered the fifth year of expansion as it recorded a double-digit growth of 11.5 per cent during the year (8.2 per cent in 2005-06), which was the highest growth achieved since 1995-96. While industrial growth was mainly driven by the manufacturing sector, both mining and electricity sectors witnessed accelerated growth. In terms of use-based classification, the performance of the capital goods sector was particularly impressive with 18.2 per cent growth. The basic goods and consumer goods sector also recorded a double digit growth of 10.3 per cent and 10.1 per cent, respectively , during 2006-07. The well-performing industrial sector was also boosted by improved performance of the infrastructure sector, registering 8.8 per cent growth during 2006-07. Table 1 Rate of growth of GDP at factor coat at 1999-2000prices (%)
Service Sector The services sector recorded double-digit growth consistently in the last three years. It grew by 11.0 per cent during 2006-07 on top of 10.3 per cent growth in 2005-06, which has been the highest growth since 1999-2000 as per the new series. Contribution of the auto sector to the GDP
The auto sector to the country's gross domestic product is expected to increase to more than 10 per cent by 2016, compared with 3-4 per cent at present. Keeping in mind the shift of manufacturing base from developed countries to emerging economies, the automotive mission plan envisages fiscal and policy modulation with a focus on exports. Inflation High levels of capacity utilisation in a number of industries, along with supply shocks from primary articles, were reflected in a rise in the inflation rate during 2006-07. Headline inflation, measured by year-on-year variations in the wholesale price index (WPI), rose to 5.9 per cent on March 31, 2007 remaining generally above the upper end of the Reserve Bank’s indicative projections of 5.0-5.5 per cent between mid-November 2006 and end-March 2007.Headline inflation moved in a range of 3.7-6.7 per cent during 2006-07; the average WPI inflation moved up to 5.4 per cent during 2006-07 from 4.4 per cent a year ago. Among the major groups, prices of primary articles exerted upward pressure on inflation during 2006-07, reflecting shortfalls in domestic supply of major agricultural crops. Fuel group inflation, which had dominated the inflation outcome during the preceding two years, eased significantly during the second half of the year to reach its lowest rate in over a decade.
Measures of consumer price inflation remained above the wholesale price inflation throughout 2006-07, mainly reflecting the impact of elevated food prices.
Fiscal Position The ongoing improvement in the fiscal position was reflected in lower estimates of key deficit indicators of the Central and State Governments in the revised estimates (RE) visà-vis the budget estimates for 2006-07. As per provisional accounts, the revenue deficit of the Central Government estimated at Rs. 80,410 crore or 1.9 per cent of GDP was lower than 2.1 per cent of GDP in the budget estimates for 2006-07and 2.6 per cent in 2005-06. The gross fiscal deficit (GFD) for 2006-07 at Rs.1,42,793 crore constituted 3.5 per cent of GDP as against the budget estimates of 3.8 per cent and 4.1 per cent in the previous year. The improvement in key fiscal indicators was enabled by the sustained buoyancy in tax revenue and containment of growth in Plan expenditure. Reflecting the process of fiscalconsolidation, the outstanding domestic liabilities of the Central Government declined to 61.5 per cent of GDP at end-March 2007 (RE) from 63.4per cent at endMarch 2006 Money supply The year-on-year increase in broad money (M3) accelerated to 21.3 per cent at endMarch 2007 from 17.0 per cent a year ago and remained above the growth rate of 15.0 per cent projected in the Annual Policy Statement in April 2006. Demand for commercial credit remained strong during 2006-07 for the third successive year, but with some moderation Bank credit The annual growth in bank credit to the commercial sector at 25.4 per cent as on March 31, 2007 was lower than 27.2 per cent a year ago. Commercial banks’ credit to Government increased by Rs.74,238 crore as against a decline of Rs 19,514 crore in the previous year, whereas net RBI credit to Government declined by Rs. 2,384 crore as against an increase of Rs.35,799 crore in the preceding year.
The banking sector’s net foreign exchange assets increased by 25.7 per cent (Rs.1,86,985 crore), primarily reflecting the increase in net foreign exchange assets of the Reserve Bank by 28.7 per cent (Rs.1,93,170 crore). Liquidity The Reserve Bank continued to take measures to increase depth and liquidity in the money, the Government securities and the foreign exchange markets during the year. Financial markets generally remained orderly during most of 2006-07 with some spells of volatility, especially in March 2007 reflecting large capital flows and swings in Government of India’s cash balances coupled with high credit demand. Interest rates in the various segments of the financial market hardened in tandem with the policy rate of the Reserve Bank. During 2006-07, the financial markets shifted from conditions of easy liquidity to occasional spells of tightness necessitating injection of liquidity through the LAF. The total overhang of liquidity under the LAF, the market stabilisation scheme (MSS) and surplus cash balances of the Central Government taken together increased from an average of Rs.74,334 crore in March 2006 to Rs.92,849 crore in September 2006. With liquidity shortages getting accentuated in the second half of March 2007 in the wake of advance tax payments, net LAF injections rose to a peak of Rs.43,075 crore on March 21, 2007.
Stock Markets The stock markets reached record highs during the year 2006-07 interspersed with periodic corrections. The primary market segment of the capital market continued to exhibit buoyant conditions. The BSE Sensex at end-March 2007 increased by 15.9 per cent (year-on-year) on top of the increase of 73.7 per cent a year ago. Strong corporate profitability and continued liquidity support from foreign institutional investors and domestic mutual funds buoyed up the stock markets even as they witnessed sharp corrections on a few occasionsy markets.
Forex Market In the foreign exchange market, the Indian rupee exhibited two-way movements in the range of Rs.43.14 – 46.97 per US dollar during 2006 - 07 with a strengthening bias from mid-July 2006. The rupee initially depreciated against the US dollar during the year, reaching Rs.46.97 on July 19, 2006, reflecting higher crude oil prices and FII outflows. The rupee, however, strengthened thereafter on the back of moderation in crude oil prices, large capital inflows and weakness of the US dollar in international markets to reach Rs.43.14 per US dollar on March 28, 2007. The exchange rate was Rs.43.60 per US dollar at end-March 2007. Balance of Payments India’s balance of payments position indicated sustained strength and vibrancy in the external sector during 2006-07, reflecting the robust macroeconomic fundamentals. The growth in merchandise export and non-oil import moderated from the strong growth in the previous year. Earnings from exports of software and other business services as well as remittances from Indians working abroad continued to exhibit buoyancy. The net surplus under invisibles expanded further during 2006-07 and continued to finance a large part of the growing merchandise trade deficit. Consequently, the current account deficit remained modest during the year, and, as a proportion of GDP, was at the same level (1.1 per cent) as a year ago. Led by foreign direct investment and external commercial borrowings (ECBs), capital flows (net) to India witnessed a large increase during 2006 07 on the back of strengthening of growth prospects, and buoyancy in domestic investment and import demand. Outward direct investment also witnessed a jump reflecting growing overseas acquisitions by Indian corporates. With net capital flows remaining in excess of the
current account deficit, the overall balance of payments recorded a significant surplus, which was mirrored in an accretion of US $ 47.6 billion to foreign exchange reserves during 2006-07. While the stock of external debt rose due to higher ECBs and nonresident deposits, net international liabilities fell, reflecting the continuous build-up of foreign exchange reserves, which rose to reach a level of US $ 199.2 billion by endMarch 2007.
Projected GDP growth rate The economy has moved to a higher growth plane, with growth in GDP at market prices exceeding 8 per cent in every year since 2003-04. The projected economic growth of 8.7 per cent for 2007- 08 is fully in line with this trend. There was an acceleration in domestic investment and saving rates to drive growth and provide the resources for meeting the 9 per cent (average) growth target of the Eleventh Five-Year Plan.
Raising growth to double digit will require additional reforms, because of the following concern areas : An appreciation of the rupee A slowdown in the consumer goods segment of industry The infrastructure (both physical and social) constraints
Contribution of the auto sector to the GDP The auto sector to the country's gross domestic product is expected to increase to more than 10 per cent by 2016, compared with 3-4 per cent at present. Keeping in mind the shift of manufacturing base from developed countries to emerging economies, the automotive mission plan envisages fiscal and policy modulation with a focus on exports.
Table 2
: Macro-economic Indicators of India
AUTO INDUSRTY ANALYSIS
GLOBAL SCENARIO
The automotive sector comprises the Original Equipment Manufacturers (OEMs) and auto component manufacturers. Globally , the automotive industry is recognised as a key component and driver of national economy. The global automotive industry is in the midst of a major structural transformation – • Among OEMs, global conglomerates are emerging, driven by mergers and alliances among manufacturers (eg : GM / Fiat / Suzuki; Ford / Volvo / Mazda). • Component manufacturers, or suppliers, are getting Tieriesed with Tier 1 supplier taking on the role of component aggregation and module supply/assembly, and component suppliers being relegated to tiers 2/3. • Relationships between OEMs and suppliers (especially Tier 1s ) are becoming increasingly collaborative.
The growth in passenger & commercial vehicles have reached a new recode of 66.46 million units in 2005-06.
OEMs are the industry's brand name auto manufacturers, such as Tata Motors, Maruti Suzuki, General Motors, Ford, Toyota, etc. The OEM definition in the automobile industry constitutes a federally-licensed entity required to warrant and / or guarantee their products, unlike "aftermarket" which is not legally bound to a government-dictated level of liability
INDIA’S POSITION
Indian Automobile Industry
Largest three wheeler market in the world 2nd largest two wheeler market in the world 4th largest passenger vehicle market in Asia 4th largest tractor market in the world 5th largest commercial vehicle market in the world
Exhibit 1
Manufacturing at a glance
BACKGROUND OFAUTO INDUSTRY
Automotive industry has universally emerged as an important driver in the economy.Although the automotive industry in India is nearly six decades old,until 1982,only three manufacturers tenanted the motor car sector . They were o M/s.Hindustan Motors, o M/s. Premier Automobiles and o M/s. Standard Motors Owing to low volumes, it perpetuated obsolete technologies and was out of sync with the world industry. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models. After the lifting of licensing in 1993, 17 new ventures have come up of which 16 are for manufacture of cars. This industry currently accounts for nearly 4% of the GNP and 17% 0f the indirect tax revenue. Extant Policy Before the removal of QRs with effect from 01-04-2001, the policy placed import of capital goods and automotive components under open general licence, but restricted import of cars and automotive vehicles in Completely Built Unit (CBU) form or in Completely Knocked Down (CKD) or in Semi Knocked Down (SKD) condition. Car manufacturing units were issued licences to import components in CKD or SKD form only on executing a Memorandum of Understanding (MOU) with the Director General Foreign Trade (DGFT). 11 companies signed MOUs with DGFT under which they agreed to:
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Establish actual production of cars and not merely assemble vehicles; Bring in a minimum foreign equity of US $ 50 Million if a joint venture involved majority foreign equity ownership;
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Indigenise components upto a minimum of 50% in the third and 70% in the fifth year or earlier from the date of clearance of the first lot of imports. Thereafter the MOU and import licensing will abate
Neutralise foreign exchange outgo on imports (CIF) by export of cars, auto components etc. (FOB). This obligation was to commence from the third year of start of production and to be fulfilled during the currency of the MOU. From the fourth year imports were to be regulated in relation to the exports made in the previous year. Current Status of Indian Automotive Industry The industry encompasses commercial vehicles, multi-utility vehicles, passenger cars, two wheelers, three wheelers, tractors and auto components. There are in place 15 manufacturers of cars and multi utility vehicles, 9 of commercial vehicles, 14 of Two/Three Wheelers and 10 of Tractors besides 5 of engines. With an investment of Rs.50,000 crores, the turnover was Rs. 59,500 crores in Automotive Sector during 19992000. It employs 4,50,000 people directly and 100,00,000 people indirectly and is now inhabited by global majors in keen contention.
India's automotive component industry manufactures the entire range of parts required by the domestic automobile industry and currently employs about 250,000 persons. Auto component manufacturers supply to two kinds of buyers – o original equipment manufacturers (OEM) o the replacement markrt Replacement market The replacement market is characterised by the presence of several small-scale suppliers who score over the organised players in terms of excise duty exemptions and lower overheads.
Original equipment manufacturers (OEM) The demand from the OEM market, on the other hand, is dependent on the demand for new vehicles. The auto sector (excluding Tractors) attained a steep cumulative annual growth of 22% between 1992 and 1997. The Tractors achieved a cumulative annual growth of 16%. Component production grew by 28%. There has been a slowdown in the automobile sector in the past two years. However, the component industry maintained a low but positive growth rate mainly due to its export performance. Over the years, the component industry has maintained a 10% - 12% share of exports in the total production. Roads occupy an eminent position in transportation as they, as per the present estimate, carry nearly 65% of freight and 87% of passenger traffic. Although, India has 3.3 million kilometers of road network, which is the second largest in the world, the Indian highways are getting overpopulated. Traffic management and road sense also need attention.
The pull & push effect on Indian automotive industry
Pull effect The following factors have made Indian economy an attractive market for global players, pulling them towards itself : Growth of Indian middle class with increasing purchasing power Strong growth of indian economy Market linked exchange rate Availability of trained manpower at competitive cost
Push effect Stagnation in developed economies like US, EU, Japan has resulted into : Forceful shifting of new capacities to India Capital flows to india So, the existence of attractiveness of indian economy pulls global players towards itself and repulsive features of developed economies which pushes the capital flows and investment to emerging indian economy have led to rise of foreign players in India auto sector. The trends affecting global auto industry have affected the Indian auto industry as well, leading to a rapid transformation of the auto industry over the last decade or so. After the end of licensing in 1993, with 100 % FDI being allowed in the year 2000 the industry has witnessed rapid growth in volumes and capacity, and 17 new ventures have come up in the last 10 years. These include Global giants such as General Motors Ford Toyota Honda Hyundai Fiat
Growth in auto sector The domestic automobile market has been growing at 14.2 per cent CAGR over the past 4 years (2000-01 to 2004-05), while the auto components market has been growing at 19.2 per cent CAGR (2000-01 to 2003-04). The industry (OEMs and suppliers together) contributed nearly 4 per cent tothe country’s GDP in 2003-04. Employment in auto sector The automotive sector also offers significant employment opportunities. It employs 0.45 million people directly and around 10 million people indirectly.
Attractiveness of Indian auto industry The industry’s capabilities in design, engineering and manufacturing have been recognised the world over, and most automotive majors are looking to increasingly source auto components from India. India is emerging as one of the most attractive automotive markets in the world, and is poised to become is poised to become a key sourcing base for auto component. The industry structure spans all segments and is concentrated in regional clusters. The India automotive sector has a presence across all vehicle segments and key components. It encompasses following segments commercial vehicles multi-utility vehicles passenger cars two wheelers three wheelers auto components
In terms of volume two wheelers dominate the sector, with nearly 80 per cent share, followed by passenger vehicles with 13 per cent.The industry had few players and was protected from global competition till the 1990s. After government lifted licensing in 1993, 17 new ventures have come up. At present, there are o 12 manufacturers of passenger cars, o 5 manufacturers of multi utility vehicles (MUVs), o 9 manufacturers of commercial vehicles, o 12 of two wheelers and 4 of three wheelers, besides o 5 manufacturers of engines. With the arrival of global players, the sector has become highly competitive.
Auto Manufacturing Units Automobile manufacturing units are located all over India. These are, however ,concentrated in some pockets Chennai and Bangalore in the south ,Pune in the west ,The National Capital Region (NCR, which includes New Delhi and its suburban districts) in the north Jamshedpur and Kolkata in the east Pithampur in the central region Regional clusters of auto components Following global trends, the Indian automotive sector also has most auto suppliers located close to the manufacturing locations of OEMs, forming regional automotive clusters. Broadly, the three main clusters are centered around Chennai Pune and the NCR.
Highly fragmented auto component sector : In terms of number of players The Indian automotive component industry is highly fragmented.There-are nearly 6,400 players in the sector, of which only about 6 per cent are organised and the remaining 94 per cent are small-scale unorganized players. In terms of value added The organised players account for nearly 77 per cent of the output in the sector. The sector manufactures components across all key vehicle systems. The breakup of the output from the organised sector, in value terms across key vehicle systems, is shown in the figure.
Exhibit : 2 key players
Table 3: Number of vehicles Produced
Production
Category Passenger Cars Utility Vehicles MPVs Total Passenger Vehicels M&HCVs LCVs Total Commercial Vehicles Three Wheelers Scooters Motor Cycles Mopeds Electric Two Wheelers Total Two Wheelers Grand Total 2001-02 500301 105667 63751 669719 96752 65756 162508 212748 937506 2002-03 557410 114479 51441 723330 120502 83195 203697 276719 848434 2003-04 782562 146325 60673 989560 166123 108917 275040 356223 935279 2004-05 960487 182018 67371 2005-06 2006-07
1046133 1238032 196506 66661 222111 84707
1209876 1309300 1544850 214807 138896 353703 374445 987498 219295 171788 391083 434423 294266 225734 520000 556124
1021013 943974
2906323 3876175 4355168 5193894 6207690 7112225 427498 351612 332294 348437 379994 379987 7982
4271327 5076221 5622741 6529829 7608697 8444168 5316302 6279967 7243564 8467853 9743503 11065142
Two wheelers, which constitute the majority of the industry volume, have been growing at a rate of 14.3 per cent, three wheelers at a rate of 14 per cent and passenger vehicles at a rate of 11.3 per cent. Commercial vehicles have been growing at a higher rate of nearly 23.5 per cent. The production and domestic sales of the automobiles in India have been growing strongly.While production increased from 5.3 million units in 2000-1 to 11 million units in 2006-07domestic sales during the same period have gone up from 5.2 million to 10.1 million units during the same period, as shown in the following table.
Table 4 : Domestic sales trend
Automobile Domestic Sales Trend ( Number of vehicles)
Category Passenger Cars Utility Vehicles MPVs Total Passenger Vehicles M&HCVs LCVs Total Commercial Vehicles Three Wheelers Scooters Motorcycles Mopeds Electrict Two Wheelers Total Two Wheelers
2001-02 509088 104253 61775 675116 89999 56672 146671 200276 908268
2002-03 541491 113620 52087 707198 115711 74971 190682 231529 825648
2003-04 696153 146388 59555 902096 161395 98719 260114 284078 886295
2004-05 820179 176360 65033
2005-06 882208 194502 66366
2006-07 1076408 220199 83091
1061572 1143076 1379698 198506 119924 318430 307862 922428 207472 143569 351041 359920 909051 275600 192282 467882 403909 940673
2887194 3647493 4170445 4964753 5810599 6553664 408263 338985 307509 322584 332741 355870 7341
4203725 4812126 5364249 6209765 7052391 7857548
Growth across the segments A positive trend in the domestic market is that the growth has not been driven by one or two segments, but is consistent across all key segments. In terms of number of vehicle sold : Two wheelers - constituting the majority of the industry volume, have experienced rise in sale from 42 lacs in 2000- 01 to 78.57 lacs during 2006-07 . Three wheelers – Rise in sales from 2 lacs in 2001-02 to 4 lacs in 2006-07. Passenger vehicles – Rise in sales from 6.75 lacs in 2001-02 to 13.79 lacs in 2006-07. Commercial vehicles – Sales have grown from1.47 lacs in 2001-02 to 4.68 lacs in 2006-07. Since nearly all macro-economic indicators GDP, infrastructure, population demographics, interest rates, etc. are showing a favourable trend, the domestic market for automobiles in India is expected to continue on its growth trajectory.
Table 5 Domestic Market Share for 2006-07 Vehicles CVs 5 Total Passenger Vehicles 14 Total Two Wheelers 77 Three Wheelers 4 % of share
Chart : Market share between vehicle segments
Market Share of Automobiles 2006-07
13% 4% 4%
79%
Two Wheelers Three Wheelers Commercial Vehicles Passenger Vehicles
Two wheelers have the highest share, followed by passenger vehicles, followed by three wheelers and commercial vehicles. The market share between different segments of vehicles has remained nearly the same changing marginally, for the past five to six years .
Table : Turnover of Automobile Manufacturers Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 (Rs. In Million) 422,933 492,024 499,136 595,184 661,769 835,851
Chart 2 Turnover of Automobile Industry 1999-00 to 2004-05
Since nearly all macro-economic indicators GDP, infrastructure, population demographics, interest rates, etc. are showing a favourable trend, the domestic market for automobiles in India is expected to continue on its growth trajectory. Commercial Vehicles The commercial vehicle production in India increased from 156,706 in 2001 to 467882 2006. This segment can be divided into three categories Heavy commercial vehicles (HCVs), Medium commercial vehicles (MDVs or MCVs) Light commercial vehicles (LCVs)
Table 7 : Market Share for Commercial Vehicle Segment Vehicle type M & HCVs ( % ) Year 2001-02 2004-05 2005-06 2006-07 62 62 41 62 38 38 59 38 LCVs ( % )
Medium and heavy commercial vehicles accounted for about 62 percent of the total domestic sales of commercial vehicles in 2001-02, 2004-05 & 2006-07 with change in proportion in the year 2005-06 in which the corresponding share was 41 cent. -Light commercial Vehicles formed 38 percent of the total domestic sales of commercial vehicles in 2001-02, 2004-05 & 2006-07. But it was 59 percent in 2005-06. -These segments have also been driving growth, having grown at a CAGR of nearly 24.7 per cent over the past five years ended on 2004-05.
The key trends facilitating growth in this sector are : development of ports and highways increase in construction activities agricultural output. With better roads and highway corridors linking major cities, the demand for larger, multi-axle trucks is increasing in India
Passenger vehicles This segment consists of passenger cars and utility vehicles.It has been growing at a CAGR of 11.3 per cent for the past four years ended 2004-05. Peculiarities of the segment A key trend in this segment is that with rising income levels and availability of better financing options, customers are increasingly aspiring for higher-end models. There has been a gradual shift from entry-level models to higher-end models in each segment. For example, in passenger cars, till recently, the Maruti 800 used to define the entry level car, and had a predominant market share.Over the last 3-4 years, higher-end models such as Hyundai, Santro, Maruti Wagon R, Alto and Tata Indica have overtaken the Maruti 800. Another development has been the blurring of the dividing line between utility vehicles and passenger cars, with models like Mahindra & Mahindra’s Scorpio attracting custommers from both segments. Upper end sports utility vehicles (SUVs) attract potential luxury car buyers by offering the same level of comfort in the interiors, coupled with onroad performance capability. Two wheelers The production of two wheelers in India increased from 4.24 million vehicles in 2001 to 7.6 million in 2005 followed by 8.45 million vehicles in 2005.The domestic sales have been increasing at a CAGR of 14.3 per cent for the 4 years preceeding 2004-05.The sales nearly doubled during 2001-02 to 2006-07 rising from 4.21 to 7.86. Motorcycles Motorcycles constituted 79.5 per cent of the domestic sales of two wheelers in India and have been growing at nearly 24 per cent CAGR.
Scooters In the scooter segment, overall domestic sales grew by1.3 per cent CAGR, driven primarily by ungeared scooters and scooters with automatic gears. The sales of mopeds have declined at a CAGR of 15.9 per cent for the four years preceding 2004-05. The motorcycle segment clearly drives the growth of the two wheeler segment in India. The two wheeler segment is being shaped by the following factors leading to an increase in demand for ungeared /autogeared scooters. Changing demographics and lifestyles. An increasing number of working women Greater affluence among college goers As with the case of passenger vehicles, there is a risingdemand for higher-end models that combine style and performance in this segment as well. In motorcycles, for example, models with higher engine capacities (125cc, 150cc or above) are proving very popular. Three wheelers The three wheeler segment in India is currently small in size, but growing rapidly. The production of three wheelers in India has increased from212748 vehicles in 2001 to 556124 vehicles in 2006. The domestic sales have increased at a CAGR of 14 per cent for the past four years from 200276 vehicles in 2001 to 403909 vehicles in 2006. These vehicles find use as passenger vehicles (auto-rickshaws) as well as small capacity commercial vehicles. (pick-up vehicles) Domestic Sales The figures for April-December 2007 over April-December 2006 indicate that domestic sales of automobiles decelerated with a negative growth rate of (-) 4.48 percent.
The cumulative growth of the Passenger Vehicles segment during April-December 2007 was 13.39 percent. Passenger Cars grew by 13.26 percent, Multi Purpose Vehicles by 21.57 percent and Utility Vehicles by 10.92 percent in April-December 2007 compared to the same period last year. In April-December 2007, the Commercial Vehicles segment grew by 3.56 percent over the same period in 2006. Light Commercial Vehicles recorded a growth of 14.32 percent; however, Medium & Heavy Commercial Vehicles witnessed a fall by 3.98 percent. Three Wheelers sales fell by 7.76 percent with sales of Goods Carriers decreasing by 18.39 percent. Passenger Carriers also fell with a negative growth rate of 0.08 percent during the period. Two Wheeler sales registered a negative growth of (-) 7.71 percent during AprilDecember 2007 over April-December 2006. Though Moped and Scooter segments grew by 19.47 percent and 16.06 percent respectively, Motorcycle and Electric Two Wheeler segments declined by 12.25 percent and 37.08 percent respectively.
Auto Components - Investments are increasing in line with the output According to Automotive Component Manufacturers Association of India (ACMA), the output of auto component industry in India has increased at a CAGR of around 25 per cent for the past three years from US$ 4470 million in 2002 to US$ 8700 million in 2005. With booming domestic sales and increasing demand from exports, the confidence of industry players is high. This is reflected in the increase in investments in capacity creation and expansion. Investments in this sector have increased from US$ 2300 million in 2002 to US$ 3950 million in 2005, a CAGR of 20 per cent. India's component industry now has the capability to manufacture the entire range of auto-components, such as engine parts, drive, transmission parts, suspension and braking
parts, electrical parts, and body and chassis parts, with engine parts making up nearly a third of all exports. Engine parts (31 per cent) Drive transmission and steering parts (19 per cent) Body and chassis (12 per cent) Suspension and braking parts (12 per cent) Equipment (10 per cent) Electrical parts (9 per cent) Others (7 per cent)
Exports of automobiles from India are booming While the domestic sales of automobiles have been increasing at a significant rate, exports have taken a quantum leap in recent years. The exports of automobiles from India have been growing at a CAGR of 39 per cent for the past four years. Exports growth has been spearheaded by the passenger vehicle segment, which has grown at a rate of 57.4 per cent.As a result, the share of passenger vehicles in overall vehicle exports has increased from 18 per cent in 1998-99 to 26 per cent in 2004-05.
Europe is the biggest importer of cars from the country while predominantly African nations import buses and trucks.The Association of South East Asian Nations (ASEAN) region is the prime destination for Indian two wheelers. Automobile Exports saw a growth rate at 17.37 percent during April-December 2007. Though exports of two wheelers segment grew by 25.44 percent and Commercial Vehicles exports grew by 15.93 percent in April-December 2007 over the same period last year, export growth in all other segments were marginal with Three Wheelers exports grew by only 1.40 percent and Passenger Vehicles exports at 2.77 per cent.
Chart 3 : Component wise exports
Auto Components exports – large potential Auto component exports from India grew from US$ 760 million in 2002-03 to an estimated US$ 1.4 billion in 2004-05. Key export destinations include o Americas (31.1 per cent) o Europe (30.3 per cent) o Asia (18.2 per cent) o Africa (10.7 per cent) and o The Middle East (7.6 per cent) Most of the key auto component manufacturers in India are very positive about the out look for exports, and expect about 15 per cent of their revenue to come from exports over the next 3-5 years. It has been estimated that exports of auto components from India could be around US$ 20-25 billion by 2015. India's component industry now has the capability to manufacture the entire range of auto-components, such as engine parts, drive, transmission parts, suspension and braking parts, electrical parts, and body and chassis parts, with engine parts making up nearly a third of all exports.
Engine parts (31 per cent) Drive transmission and steering parts (19 per cent) Body and chassis (12 per cent) Suspension and braking parts (12 per cent) Equipment (10 per cent) Electrical parts (9 per cent) Others (7 per cent)
SWOT ANALYSIS STRENGTHS – growth drivers of the India Very strong base of auto parts & components The foundation of a strong and unparallel auto component industry was laid down with Tariff commission recommendation in 1953 for a balanced and integrated development of the automotive industry through a strong base of the auto component industry the phased manufacturing programme introduced in 1980s for localization of input Size of the auto component industry is at present USD 9.4 billion, of which - USD 9.4 billion is the domestic OEM - USD 2.6 billion is the domestic aftermarket - USD 2.0 billion comprises of the export components low cost of labour Labour is a cheap factor of production in India. So India continues to attract the attention of the auto mobile producers. . Skilled manpower India has the potential to provide skilled manpower.The enigeering and managerial manpower require for the auto industry is adequately met by the IITs and IIMs. Rising per capita income India’s per capita income is rising and so the income available for consumption is increasing.With rise in the disposable incomes there will be an increase in demand.
Favourable demographic changes India has the highest proportion of population below 35 years. With 70 percent of the population falling in this range the demand gets a boost.It means that between 2003 and 2009 130 million people will be added to the working population.
Easy finance options There exists facility of vehicle financing through borrowing loan. Urbanisation Urbanisation driven growth of the two and three wheeler segments Increased urbanization and education accompanied by career awareness has resulted into growth of the two wheelers. Agriculture Due to the agricultural output of India and the agri exports there is a rise in the demand for tractors, which is one of the factor leading the Indian auto sector towards growth. WEAKNESSESS Technology It needs up gradation. Also there is an urgent need to keep up with the global standards. Pollution and environment OPPORTUNITIES Research & development In order to provide the latest available technology the government has under taken the NATRIP ( National automotive testing and R & D infrastructure development project). If it is carried out successfully it would provide an edge to the Indian auto sector over its global counterparts. The Government shall promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives. The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for sponsored research and in-house R&D expenditure. This will be improved further for research and development activities of vehicle and component manufacturers from the current level of 125%.
In addition, Vehicle manufacturers will also be considered for a rebate on the applicable excise duty for every 1% of the gross turnover of the company expended during the year on Research and Development carried either in-house under a distinct dedicated entity, faculty or division within the company assessed as competent and qualified for the purpose or in any other R&D institution in the country. This would include R & D leading to adoption of low emission technologies and energy saving devices. Government will encourage setting up of independent auto design firms by providing them tax breaks, concessional duty on plant/equipment imports and granting automatic approval. Allocations to automotive cess fund created for R&D of automotive industry shall be increased and the scope of activities covered under it enlarged. Additional employment The automotive sector should be able to provide an additional employment to 25 million people in the next nine years. Hub The AMP proposed a 25-point plan, including making India the manufacturing and export hub for small cars, multi-utility vehicles, two and three-wheelers, tractors and components. Increase in turnover The automobile sector is set to see an increase in turnover to $145 billion by 2016 from the present $35 billion
THREATS Infrastructure bottle necks India lags behind in terms of infrastructure facilities. Roads are in very bad condition.
Focus is required here to improve upon the infrastructure facilities, which if not done may cause serious impediment to auto sector and hence the related sector growth. Traffic on roads is growing at a rate of 7 to 10% per annum while the vehicle population growth for the past few years is of the order of 12% per annum. Poor road infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry. Solution A balanced and coordinated approach will be undertaken for proper maintenance, upgradation and development of roads by encouraging private sector participation besides public investment and incorporating latest technologies and management practices to take care of increase in vehicular traffic. For the convenience of traveling public the Government shall also promote multi-modal transportation and the implementation of mass rapid transport systems.
Environmental aspects The automotive and oil industry have to work together in a rhythmic manner to constantly fulfill environment imperatives. The Government will continue to promote the use of low emission fuel auto technology. Expert Committee on Auto Fuel Policy The Government after considering the recommendations of the Expert Committee on Auto Fuel Policy headed by Dr. R.A. Mashelkar, have approved a road map for implementation for the auto fuel quality consistent with the required levels of vehicular emissions norms and environmental quality. The Government will formulate a comprehensive auto fuel policy covering the other related aspects and ensure availability of appropriate auto fuel/fuel mixes at minimum social costs across the country.
Suitable institutional mechanism will be put in place for certification, monitoring and enforcement of different technologies/fuel mixes. Appropriate fiscal measures will be devised to achieve milestones in the roadmap for implementation of auto fuel policy. In the short run, the Government will encourage the use of short chain hydrocarbons along with other auto fuels of the quality necessary to meet the vehicular emissions norms. Non-conventional fuels There is prime need to support the development and introduction of vehicles propelled by energy sources other than hydrocarbons by promoting appropriate automotive technology. Hybrid vehicles and vehicles operating with batteries and fuel cells are alternatives to the conventional automobile, which in their early beginnings, lie intreasured. As an impetus for the development of such vehicles, an appropriate longterm fiscal structure shall be put in place to facilitate their acceptance vis-à-vis vehicles based on conventional fuels.
Vehicle fleet managenent Internationally, the practice is to levy higher road tax on older vehicles in order to discourage their use. In India, the road tax on vehicles varies in nature and quantum among the states. Lifetime road tax is also in vogue. The endeavour will be to move to the international model. In order to facilitate faster upgradation of environmental quality, the Govt. will consider having a terminal life policy for commercial vehicles alongwith incentives for replacement for such The new vehicles are cleaner and meeting stringent emission requirements, the benefits are not reflected in the ambient air quality due to the presence of a large number of old and ill maintained polluting vehicles.
The fleet renewal programme appears to be an effective measure to combat the problem of vehicular pollution The recommended action would be for the Government to notify a retirement scheme to be operated through a single window. It would help in removing older, potentially polluting and unsafe vehicles from the road. The replacement of these older vehicles would also have an additional favourable impact on the economy: o This project would generate additional demand for new vehicles o The country would benefit by way of reduction in expenditure account of fuel o Rise in saving by retiring old vehicles and replacing them with more new ones, which are more fuel efficient. o Reduction in pollution would lead to substantial health benefits Reduction in cost of medical treatment Reduction in premature deaths Reduction in man days lost on account of illness and so on.
The focus in the first phase would be in the seven principal cities namely Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad and Ahmedabad. This should be treated as a model and extended gradually to all other cities across India over a 3 to 5 year timeframe.
Building Bye Laws for Residential, Commercial and Other Uses With the growth of vehicles, smooth traffic movement has come under severe strain. The problem has been aggravated because of inadequate provision of parking facilities generally. Starting with metropolitan and important towns, the Government will pursue with State Governments and Local bodies amendments to bye laws for upward revision of the parking norms for new residential buildings, construction of common parking for existing residential areas besides parking upgradation in all commercial areas. Multistoried parking shall also be encouraged.
Continous innovation There is an urgent need for continous innovation to have a strong position in the industry.
PORTER’S DIAMOND FRAMEWORK
Availability of skilled manpower with engineering and design Capabilities India has a growing workforce that is English-speaking, highly skilled and trained in designing and machining skills required by the automotive and engineering industries. In a combined assessment of manpower availability and capabilities, India ranks much ahead of other competing economies as shown in the figure below. Large market with significant potential for growth in demand India offers a huge growth opportunity for the automobile sector –the domestic market is large and has the potential to grow further in the future due to positive demographic trends and the current low penetration levels.
Chart 4 India’s relative competitivenes
Outsourcing Many Indian and global players are leveraging this advantage by increasingly outsourcing activities like design and R&D to their Indian arms. The Society of Indian Automobile manufacturers (SIAM) estimates that automotive vehicle manufacturers are expected to invest US$ 5.7 billion in the Indian market from 2005 to 2010. Of this, about US$ 2.3 billion will be on research and development US$ 3.4 will be on capex
Some examples of investment in areas leveraging the engineering and design capabilities of India include: • MICO, the Indian operation of Bosch and a key player in fuel injection equipment, ignition systems and electricals, has invested in the MICO Application Centre (MAC) for R&D.It has emerged as a key global R&D competency centre catering to the entire Bosch Group. It is the first of its kind in India and the Bosch Group’s first outside Europe. • GM set up a technical centre at Bangalore that became fully operational in September 2003. The centre focuses on both R&D and engineering, and takes up high-value work to complement current research programmes, as well as new exploratory research projects. • Ford set up Ford Information Technology Services India (FITSI) in Chennai, which caters to the software requirements of Ford Motor Company in the region and around the world. FITSI develops solutions for Ford worldwide. For example, it developed web-based customer relationship services for o Ford India o Australia o South Africa. In addition, Ford has shifted the CAD/CAM development, e-mail processing an application development from worldwide operations to India’s FITSI. The Indian automobile industry is highly competitive with a large number of players in each industry segment. Vehicle segment Most of the global majors are present in the – passenger vehicle segment two wheeler segment
Component Segment In the components industry too, global players such as Visteon , Delphi and Bosch are well established, competing with domestic players. Table 8 Competitive industry, with global players SEGMENT Commercial Vehicles KEY PLAYERS Tata Motors, Ashok Leyland, Swaraj Mazda, Mahindra & Mahindra, Bajaj Tempo, Eicher Motors
Passenger vehicles
Tata Motors, Maruti Udyog, Honda Motors, Hyundai Motors, Toyota, Skoda, Mahindra & Mahindra, Daimler Chrysler, Hindustan Motors
Two Wheelers
Hero Honda, Honda Motors, Bajaj Auto, TVS Motors, Yamaha, Kinetic Engineering
Three Wheelers
Bajaj Auto, Piaggio India
Positive impact of competition The presence of global competition has led to an overall increase in capabilities of the Indian auto sector. Increase in competition has led to Pressure on margins, Players have become increasingly cost efficient
Quality levels have gone up An increasing focus on compliance to TPM, TQM and Six Sigma processes. This has led to an increased confidence among domestic players, who are now focusing on opportunities abroad. Key players in the components sector like Bharat Forge and Sundaram Fasteners have become key global suppliers in their categories. Large target consumer base and rising income levels India has nearly 23 per cent of the global population and is one of the most attractive consumer markets in the world today. Growing Consumer Class Income levels across population segments have been growing in India. According to National Council of Applied Economic Research (NCAER) data, The consuming class, with an annual income of US$ 980 or above, is growing…. And is expected to constitute over 80 per cent of the population by 2009-10. Young Population In addition, a large proportion of the Indian population is relatively young - in the age group of 20-59 years. This is expected to further boost the automotive domestic market as a younger population has a higher consumption index. The rise in income levels of the Indians and the emergence of the consuming class that has higher propensity to spend offers great opportunities for growth to companies across various sectors.
Changing lifestyles, driving demand for new segments Changing nature of the Indian Consumer Consumers in India are now more informed, sophisticated and demanding. Urban consumers have been especially exposed to western lifestyles through overseas travel. For example, more than 5 million Indians traveled overseas last year and this number is expected to increase by 15 per cent to 20 per cent per annum.
Nuclear families with working women An increase in the number of working women and the prevalence of nuclear doubleincome families, especially in urban areas, are other trends shaping lifestyles.
These changes are driving an increased need for personal transport, especially in segments like working women young executives teenagers
This has led to the growth in demand for motorcycles, ungeared and automatic scooters and compact cars.Across the automobile spectrum, consumer aspirations are driving demand for upper end models in all segments.
Presence of strong industry associations and supporting industries Industry Associations The Indian automotive industry is well served by the two industry associations Society of Indian Automobile Manufacturers (SIAM) that represents the OEMs Automotive Components Manufacturers’ Association (ACMA) that represents the components industry.
Both associations actively engage with industry, government and other stakeholders to promote the interests of the industry and improve competitiveness.
Supplier base Indian automobile manufacturers are well supported by the automotive component industry. Indian companies produce a range of automotive components like engine parts electrical parts equipments Ford is leveraging the large, high quality automotive supplier base of India and has made India a component-sourcing base. This has helped Ford reduce the cost of manufacturing and increase its exports. Ford India awarded the Q1 supplier status to 10 suppliers to help them export their products to Ford worldwide.
Government Regulations and Support The Auto Policies of Government of India are to facilitate sustainable development of Indian Automobile industry. “ Automotive Mission Plan 2006-2016 - A Mission to develop the Indian Automotive Industry” was an outcome of in-depth discussions with the all stakeholders – industry academia and authorities over a period of fifteen months. Inter ministerial groups formed focused on key areas. Major areas of focus were : Development of Infrastructure Induction of Technology Research and development Labour Reforms Employment related issues Change in fiscal and policy parameters Human resource development
Growth of domestic demand as well as exports Environmental and safety issues
The Indian automotive industry will have a distinct edge amongst the newly emerging automotive destinations of the world.
This will be possible is because of – Time bound implantation of the auto policy 2006- 20016 Establishment of world class testing, homologation certification facilities nine state of art R & D centres under NATRIP ( National automotive testing and R & D infrastructure development project)
The Government of India (GoI) has identified the automotive sector as a key focus area for improving India’s global competitiveness and achieving high economic growth. Vision “To establish a globally competitive industry in India And to double its contribution to the economy by 2010.”. “To emerge as the destination of choice in the world for design and production of automobiles and auto components with the output reaching US$145 billion, accounting for more than10 percent of the GDP and providing additional employment to 25 million people by 2016.”
It intends to promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives.
Some of the policy initiatives include: • Automatic approval for foreign equity investment upto 100 per cent of manufacture of automobiles and component is permitted. • Customs Duty Inputs and raw material The customs duty on inputs and raw materials has been reduced from 20 per cent to 15 per cent. Auto components The peak rate of customs duty on parts and components of battery-operated vehicles have been reduced from 20 per cent to 10 per cent. Second hand cars Apart from this, custom duty has been reduced from 105 per cent to 100 per cent on second hand cars and motorcycles. These new regulations would strengthen India’s commitment to globalisation. • National Automotive Fuel Policy has been announced, which envisages a phased programme for introducing Euro emission and fuel regulations by 2010.
• Tractors of engine capacity more than 1800 cc for semi-trailers will now attract excise duty at the rate of 16 per cent.
• Excise duty is being reduced on tyres, tubes and flaps from 24 per cent to 16 per cent. Customs duty on lead is 5 per cent. • A package of fiscal incentives including benefits of double taxation treaty is now available.
These government policies reflect the priority government accords to the automobile sector. A liberalised overall policy regime, with specific incentives, provides a very conducive environment for investments and exports in the sector.
Economic Affairs Excise Duty Excise Duty is essentially a manufacturing tax imposed on all vehicles manufactured in India. The same rate is applicable to imported vehicles in the form of Counter Vailing Duty (CVD). At present the excise duty on automobile falls between 16 – 24 percent depending on the vehicle type, its build and component and final use or purpose. The excise duty on vehicles used by physically disabled people is nil. Only Petrol driven Goods Transport Vehicles falling under tariff heading 8704 to attract duty of 24 %.
Duty on CNG/LPG Vehicles falling under tariff heading 8704 to attract only l6% excise duty.
Custom Duty Custom Duty is essentially an import duty applicable on all imports.
Custom Duty for items falling under 8703 & 8711, • If imported as Completely Knocked Down (CKD) unit 10% • If imported in any other form/ new 60%
VAT has recently replaced Local Sales Tax in India. However, VAT has not yet been adopted by all states in India.
.SIAM (Society of Indian Automobile) suggestions for VAT Implementation 1. VAT in all States VAT system of taxation required to be implemented simultaneously throughout the country in all States and Union Territories at the same time. This will avoid serious market distortions and enhances industry's competitiveness. 2. Uniform VAT Law and procedure India has often been described as a country with large market. But unfortunately this large market has been highly fragmented by inter-state barriers. It is further complicated by State specific law on sale of goods. The wide divergence in the structure and practice has hampered free flow of goods and services within the country and effected competitiveness of Indian Industry. Homogeneity is the essence of VAT and all States should come together to accept a common law under VAT. All forms, returns & declarations should be common to avoid artificial barriers and complexities. 3. State VAT Rate and Classification of goods Uniform rate structure across the country helps in avoiding diversion of trade from one State to another checks unhealthy competition reduces tax evasion enables the automobile industry to plan and commit long term investments
Basic rationale needs to be developed for generation of revenue from industrial products. This should be long term and the share of taxation in the total value of the ultimate customer, needs to be defined. SIAM recommends such a policy in taxing goods and services under VAT.
Total taxes from both Centre and State as proposed by SIAM not to exceed 25%. Considering Cenvat at 16%, Designated rate should not exceed 9%. Uniform classification of goods The classification of goods should be aligned to central taxes to reduce litigation. Uniform classification across all States and central taxes would create favourable environment for growth of industry. No separate classification of Capital Goods 4. Multiple levies and Industrial input One of the stated objectives of VAT is to reduce multiple levies. Number of rates under VAT should be 0%, 4% & RNR in addition to 1% on precious metal and 20% on petroleum products. All other levies like Octroi, Entry Tax should be abolished. Inputs used in the manufacturing should be taxed at 4% against issue of declaration. There should not be any specific list of industrial input, as it will deprive the benefit to the industry using input other than the one mentioned in the list. Reduced rate on industrial input will avoid refund problem and avoid unnecessary interaction with the Department. Further when interstate transactions are zero rated, manufacturer selling predominantly in interstate ends up having huge input tax credit without set-off. Automobile manufacturers having one manufacturing facility in the country sells more than 80% of the production outside the Sate and forced to seek refund from the State Government for excess input tax credit. SIAM suggests VAT rate of 4% on all industrial input to mitigate the refund issue. 5. Set-off mechanism Set-off of tax paid should be allowed for all inputs including raw material, components, consumables, fuel and capital goods. Tax paid on services should be allowed to be setoff. Tax paid on capital goods should be allowed as set-off in full in the same year to avoid confu -sion and litigation later.
6. Interstate transactions All interstate transactions should be at zero rate. Further automobile manufacturers 'Stock Transfer' goods by setting up huge facilities to strengthen distribution net work in order to reach the product to the customer at the earliest and at least cost. This mechanism should not be affected even under VAT. 7. Sales Tax Incentives Automobile manufacturers have made huge investments, which are in phases in unviable locations. These locational disadvantages are partially offset by fiscal incentives. Any detrimental variations or withdrawal will affect the viability of such investments. This may adversely impact the country's image as an attractive investment destination. It is heartening to note that all States have agreed in principle to honour all existing incentives under VAT SIAM suggests the following: Table 9 Incentive Input Tax Exemption Output Tax Exemption Output Tax Deferral Input Tax Exemption & Output Tax Exemption Input Tax Exemption & Output Tax Deferral SIAM Suggestion . Refund Input Tax separately - adopt Maharashtra model · Continue exemption, Option to Defer output tax · Continue Deferment, refund input tax separately. · Refund Input Tax separately, Option to Defer output tax · Refund Input Tax separately, to Defer output Tax
8. Refunds Due to various reasons there is no alternative but to seek refund from the Government in case of excess credit. Given the state of finances, refunds will be difficult and uncertain while locking up working capital for industry.
Refunds should be honoured within 15 days from the date of filing returns and credited to the assessee's account. Alternatively, VAT Entitlement Certificate on the lines of freely tradable DEPB may be considered. 9. Industry Representation Empowered Committee may consider inducting industry representation in the committee for transparency and smooth introduction of VAT.
The outlook for India’s automotive sector appears bright The outlook for India’s automotive sector is highly promising. Growth In view of current growth trends and prospect of continuous economic growth of over 5 per cent, all segments of the auto industry are likely to see continued growth. Infrastructure Large infrastructure development projects underway in India combined with favorable government policies will also drive automotive growth in the next few years. Finance Easy availability of finance and moderate cost of financing facilitated by double income families will drive sales in the next few years. Outsourcing hub India is also emerging as an outsourcing hub for global majors. Companies like GM, Ford, Toyota and Hyundai are implementing their expansion plans in the current year. Ford and Toyota continue to leverage India as source of components.Hyundai and Suzuki have identified India as a global source for specific small car models
Overseas ventures At the same time, Indian players are likely to increasingly venture overseas, both for organic growth as well as acquisitions. The automotive sector in India is poised to become significant, both in the domestic market as well as globally.
Highlights of Union Budget 2007- 08 A. Main Highlights
Plan allocation increased by 18% .However, Capital expenditure increase is only 9% against Revenue expenditure increase of 20%. Focus on Roads including NHDP allocation which is 7.2%; PPP model to be encouraged further. Increased outlay on JNURM from Rs 4595 crores to Rs 4987 cr. Use of Foreign Exchange reserve for infrastructure finance. Emphasis on developing skilled and trained manpower; Increased funds and Interest free loan for upgradation of ITIs. Setting up of Green House Gas Emission Committee. B. Excise Duty Structure (in %) Bio-Diesel is exempted from excise duty. C. Customs Duty Structure Peak Rate of Customs Duty reduced to 10% from 12.5%. Customs Duty on various Components & Raw Materials reduced. D. Central Sales Tax CST reduced to 3% from 4%. GST to be introduced with effect from April 1, 2010.
G. Service Tax No change in the Service Tax rate. Service tax net widened; Service tax imposed on design services.Only Petrol driven Goods Transport Vehicles falling under tariff heading 8704 to attract duty of 24 %. Duty on CNG/LPG Vehicles falling under tariff heading 8704 to attract only l6% excise duty.
The automotive sector is growing strongly in both domestic and exports markets. Indian automobile industry has been performing well both in the domestic and the international markets. Automobiles - Domestic Performance Table 10 Capacity installed Installed Capacity in Indian automobile Industry 2003 -04 2003-2004 Installed Capacity (In Million) a) Four Wheelers b) Two &Three Wheelers c) Engines 2004-2005 Installed Capacity (In Million) 1.51 a) Four Wheelers 7.83 b) Two &Three Wheelers 0.18 c) Engines 1.72 9.13 0.18
The world's top car makers turn to India for the nuts and bolts of their vehicles. Riding this success, and capitalising on the spiralling demand of domestic auto companies, the Indian automobile components industry has emerged as one of India's fastest growing manufacturing sectors, and a globally competitive one. According to the Auto Component Manufacturers Association (ACMA), the apex body of component makers in India, global sourcing of components from the country will
double from US$ 2.95 billion to US$ 5.9 billion in 2008-09, and is slated to hit US$ 20 billion in seven years. Of the total global auto components trade of US$ 185 billion, India's share is 0.4 per cent. The auto component sector generated sales of about US$ 15 billion in fiscal year 200607, including US$ 2.8 billion worth of exports, says ACMA. Industry sales will swell to US$ 40 billion by 2016 with US$ 20 billion coming from exports, ACMA says. The global auto component industry is expected to touch US$ 1.9 trillion by 2015, of which around 40 per cent (US$ 700 billion) is potentially expected to be sourced from low cost countries like India. The ACMA-McKinsey Vision 2015 document estimates the potential for the Indian auto component industry to be US$ 40-45 billion by 2015. Of this, 50 per cent is expected to come from exports. India is estimated to have the potential to become one of the top five auto component economies by 2025. The industry has been experiencing a high growth rate of 20 per cent over the period 2000-05 and is expected to grow at a rate of 17 per cent over the period 2006-14. The growth rate of exports has been 25 per cent during 2000-05, the growth rate is expected to grow by 34 per cent during 2006-14. A large number of cars in North America, Europe and in other auto marts of the world now carry Indian brands under their bonnets. Of the US$ 2.21 billion worth of component exports by the Indian auto component industry, around 70 per cent are bought by global majors such as General Motors, Ford Motor and DaimlerChrysler, among others. India's component industry now has the capability to manufacture the entire range of auto-components, such as engine parts, drive, transmission parts, suspension and braking parts, electrical parts, and body and chassis parts, with engine parts making up nearly a third of all exports.
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Engine parts (31 per cent) Drive transmission and steering parts (19 per cent) Body and chassis (12 per cent) Suspension and braking parts (12 per cent) Equipment (10 per cent) Electrical parts (9 per cent) Others (7 per cent)
The India Advantage Steered here by India's sophisticated engineering skills, established production lines, a thriving domestic automobile industry and competitive costs, global auto majors are rapidly ramping up the value of components they source from India. The share of exports in total production has risen from 10 per cent in 1997 to 18 per cent in 2006. The industry is poised to jump from exports of US$ 1.8 billion in 2004-05 to US$ 2.89 billion in 200607 and US$ 5.9 billion in 2008-09. According to ACMA, more than a third (36 per cent) of Indian auto component exports head for Europe, with North America featuring a close second at 26 per cent. The composition of exports in terms of the proportion of original equipment manufacturer (OEM) and aftermarket has undergone a sweeping change since the past decade. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2006. In 2006, components worth US$ 2 billion were exported by Indian companies, 75 per cent of which were bought directly by car companies. While exports have been booming, there has been a sharp rise in imports of auto components as well, especially in the last three years. From an import of US$ 250 million in FY03, they have gone up to US$ 750 million in FY06. This is a healthy trend, indicative of rising domestic demand. Over 20 OEMs have set up their International Purchase Offices (IPOs) in India to the components. This number is expected to double by the year 2010. The OEMs in India
include firms like General Motors, Ford Motor Company, Cummins International, Bosch, Volkswagen, BMW, MAN (trucks) and JCB (earthmoving equipment) amongst others. India enjoys a cost advantage with regard to castings and forgings. The manufacturing costs in India are 25 to 30 percent lower than its western counterparts. India's competitive advantage does not come from costs alone, but from its full service supply capability. Besides, the quality consciousness of the industry matches global standards now. This is corroborated by the fact that nine Indian companies in the automotive sector have received the coveted Deming Prize, which is the largest number outside Japan. Investments Since 2000, the auto component industry has recorded an investment level of US$ 0.44 billion and has attracted US$ 530 million in terms of foreign direct investment (FDI). The Investment Commission has set a target of attracting foreign investment worth US$ 5 billion for the next five years to increase India's share in the global auto components market from the present 0.4 per cent to 3-4 per cent.
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Chrysler is setting up a local sourcing unit in Chennai and is expected to start sourcing for its global plant by next year. Palfinger AG, the Austrian hydraulic lifting, loading and handling systems manufacturer, has joined hands with Western Auto LLC, Dubai, the vehicle dealership arm of ETA Star group, have invested US$ 1.7 million to set base in India.
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IFCI Venture Capital Funds Ltd is launching a private equity fund in association with German consultancy UBF-B worth US$ 144.67 million focussed entirely on domestic automotive components industry.
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The world’s third largest auto components maker, Magna International Inc., plans to bring two more group companies to India in the next 12 months and is considering the Gurgaon, Chennai and Pune regions for these manufacturing facilities.
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Auto parts maker Robert Bosch of Germany will invest US$ 201.4 million in its Indian subsidiaries over the next two years. Ashok Leyland and Nissan Motor have invested US$ 500 million in three joint ventures to manufacture light commercial vehicles (LCVs), LCV engines and power train components.
Global OEMs sourcing parts from India include General Motors, Ford, Fiat, DaimlerChrysler, Eaton Corporation, Renault, Volvo. General Motors has decided to increase sourcing and intends to ship parts worth US$ 1 billion to its global production units by 2010. Ford Motor has also planned to source components worth US$ 500 million from India for its global operations. Not only global investors, Indian component companies are also pumping in huge sums into expanding operations:
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Bharat Forge invested US$ 135 million in its Pune plant for increasing domestic capacity to 240,000 tons.
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Amtek Auto is expanding capacity of its castings unit to 70,000 tonnes per annum (tpa) from 30,000 tpa.
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Sona Koyo plans to have capacity of three million pieces of manual steering gears, 500,000 units of hydraulic power steering and 250,000 units of electronic power steering (EPS), apart from doubling the capacity of steering columns from one million parts.
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Rico Auto is investing US$ 23 million to expand capacity.
Government initiatives The Government of India allows automatic approval for foreign equity investment up to 100 per cent for the manufacture of auto components. Manufacturing and imports in this sector is free from licensing and approvals. There is no local content regulation in the auto industry. The engineering export promotion council under the aegis of Ministry of Commerce and Industry, Government of India, over the years has been engaged in
promoting exports of engineering goods including auto parts. Among other initiatives that have been effected in 2006-07 are:
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Setting up of the National Automotive Testing and R&D Infrastructure Project (NATRIP) at a total cost of US$ 388.5 million for enabling the industry to usher in global standards of vehicular safety, emission and performance standards.
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Finalization of the Automotive Mission Plan (AMP) 2006-2016 for making India a preferred destination for design and manufacture of automobile and automotive components.
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The reduction in customs duty -- maximum level of 7.5 per cent -- on key metallic raw materials and inputs for the auto-component industry.
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Reduced excise duty on small cars to 16 per cent, a step which would propel India as a global manufacturing hub for small cars and directly enable the autocomponent supplier industry to attain volumes.
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Reduction of peak rates of duty from 15 to 12.5 per cent. The government has notified setting up an automobile testing and homologation centre, International Centre for Automotive Technology (iCAT), at an investment of US$ 15.23 million which would act as an accredited agency to approve homologation standards for automobiles.
The road ahead Exciting times lie ahead for the Indian automotive component industry. The Indian auto component industry is likely to almost double to US$ 18.7 billion by 2009 and reach about US$ 40 billion by 2014. Besides the burgeoning demand from global auto majors, there is also the domestic car industry, which is growing at a spanking rate of over 20 per cent, driven by a rising consumer base and affordable loans. The Indian automotive industry has witnessed an unprecedented boom in recent years, owing to the improvement in living standards of the middle class, and a significant increase in their disposable incomes.
The industry is expected to touch the 10 million mark, to which the Commercial Vehicle Segment will be a major contributor. Industry experts peg the Indian Automobile sales growth at a compounded annual growth rate (CAGR) of 9.5 per cent - 13008 million vehicles - by 2010. Production Growth in consumer-spending habits has reshaped the industry which has spurred an enormous cost advantage in manufacturing, research and development (R&D), skilled labor, software, and design, encouraging leading automakers to perceive India as a global player in this sector. Marked by consistent growth at a frantic pace, the automobile industry recorded production of a wide variety of vehicles - including over 2.06 million four-wheelers (passenger cars, light, medium and heavy commercial vehicles, multiutility vehicles such as jeeps), and over 9 million two-and-three wheelers (scooters, motor-cycles, mopeds, and three wheelers) - in 2006-07. Sales Domestic passenger car sales in India increased by 16.42 per cent in November to 1,03,031 units from 88,501 units in the same month last year. According to the figures released by the Society of Indian Automobile Manufacturers (SIAM), commercial vehicle sales during the month rose by 0.38 per cent at 40,466 units, against 40,313 units for the corresponding period last year. The Society of Indian Automobile Manufacturers' Association (SIAM) estimates sales figures of 7 million motorcycles, 1.55 million cars (including MPVs, SUVs and MUVs) and 8.3 million two-wheelers, for the 2007-08 fiscal. Consequently, India should be able to contribute about 3 per cent to the total automotive industry output by end-2007.
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Maruti Udyog Ltd, India's biggest car maker, recorded a growth of about 20.7 per cent during April-August 2007 - selling 2,93,536 vehicles as against 2,43,211 in the corresponding period of the previous year. For the first time, Maruti Suzuki sold more cars in India than its parent in Japan during the first half of the fiscal year.
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Mahindra & Mahindra Limited (M&M) cumulative sales (including exports) during the April-September period grew by 35.8 per cent - 1,06,094 units compared to 78,144 units in the corresponding period last fiscal.
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Honda Siel Cars India Ltd. (HSCI), one of the leading manufacturers of premium cars in India, recorded a growth of 16.1 per cent in cumulative sales during January-August 2007 over the previous year selling 41,638 units against 35,853 units.
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SkodaAuto has already doubled sales targets to 25,000 units this year, from 12,000 units in 2007, paving the way for local production.
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Hyundai Motors India Limited (HMIL) exported 67,625 units during AprilSeptember and gained 14 per cent - constituting 68 per cent of all car exports from India in the half-year period.
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DaimlerChrysler sold 1,681 units during January-August 2007 - growth of over 22 per cent from a year ago.
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General Motors India (GM), the wholly owned subsidiary of General Motors Corporation, US, reported 114 per cent increase in domestic sales in August - at 5,817 units against 2,720 units in the same month last year.
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Hero Honda crossed the 2 million unit sales mark during January-August 2007 Motorbike exports from India grew to 3, 21,321 units in the April-August period this fiscal from 2,37,103 units in the same period last year.
Recent models which have witnessed huge sales are:
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Maruti's sedan SX4 and Zen Estilo. Mahindra Renault's Logan General Motors' Chevrolet Spark and Aveo UV-A Hyundai's Verna Fiat Palio's new 1.1 litre version Tata Motors Magic and Winger
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Volkswagen's Passat
FDI in the automobile sector The Indian automobile success story has paved the way for foreign investments, making India an attractive destination for global players like Japanese, Korean, European, and American OEMs which made a foray in the Indian market and added over 1 million fourwheelers during 2005-06. International carmakers are now shifting focus to India, from China, to establish their manufacturing plants and units:
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Suzuki Motor Corp will make India a production hub and build a new 'world car' in the country, and is beefing up its vehicle line-up and dealer network in a bid to retain its market-share of at least 50 per cent. With a capacity to make 1 million units by 2010-11, it is investing US$ 1.75 billion in R&D.
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GM India reported a whopping 110 per cent jump in its domestic sales during November at 5,356 units against 2,554 units in the same month last year.
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HMIL is also looking at exporting 50 per cent of its car production in India. By 2008, the company plans to produce 6,00,000 units at its Chennai plant, half of which will be exported. India will account for 30 per cent of its international production by next year.
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Harley Davidson may finally hit the Indian roads. In an effort to ease import of all bikes with over 800cc engine capacity, as India has now allowed import of all such bikes which have been tested and approved (read homologated) by any certified agency from the European Union.
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Yamaha Motor India has already launched its two super bikes - 1,000 cc YZF R1 and 1,680 cc MT01 - in India.
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Audi AG has started production on its midsize A6 luxury sedan, with the aim of producing more than 2,000 cars a year by 2015 at the plant in Aurangabad, Maharashtra. It will invest US$ 29.37 million by 2015 in India, and also begin assembly of its A4 model aiming for a bigger share of the fast-growing market.
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Volkswagen may make India a base to make cars exclusively for the world market. It is setting up a US$ 601.6 million production plant in Pune to
manufacture B/B Plus segment car specifically designed for India, and expects to sell about 4,00,000 cars in 10 years in India.
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SkodaAuto plans to make India its regional manufacturing hub. It will start producing cars in India by 2010 with a manufacturing target of 50,000 units.
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Piaggio will step up production in India and launch scooters in a market that is set to play a greater role in the Italian firm's global operations. It has also entered a new agreement with India's Greaves Cotton for diesel engines for three-wheelers.
The Nano revolution Tata Motors has introduced the global auto industry to a whole new consumer segment, with the 'Nano' also shedding light on how to leverage emerging markets as innovation hubs. The Nano promises to be a potentially revolutionary innovation, delivering a car to huge segments of the market hitherto unable to afford one. This Tata small car is a landmark event in India as well as the world's automobile history. The Tata Motors plant in Singur in West Bengal has a maximum capacity of 2,50,00; at full capacity the Nano has the potential to become the largest selling model in India. The first truly original automobile product from India, Nano is powered by a 623 cc, four-speed manual transmission engine. Despite the small size it is a modern car capable of meeting BharatIII and Euro-4 emission norms and safety standards. Mergers and Acquisition (M&A), Joint Venture (JV) An upbeat Indian economy, corporate cash and friendly government policies have contributed to the new M&A trend. Indian companies are now aggressively looking at North American, European markets and Asia to spread their wings and become global players in this sector. Indian automotive industry now has the dynamics of an open market. Many JVs have been set up in India with foreign collaboration, both technical and financial with leading global manufacturers. This has led to the recent spurt in the demand for new automobile models in India where over 20 models have been launched in only passenger vehicle segment over the past 12 months.
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Tata Motors is a front runner in acquiring US-based Ford Motors of Jaguar and Land Rover.
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DaimlerChrysler AG of Germany has taken a call option to buy 26 per cent in Jalandhar-based bus body builder Sutlej Motors.
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German auto major Daimler will hold 60 per cent stake in its commercial vehicle joint venture in India with the Hero group holding the remaining 40 per cent, with a total investment of about US$ 870.5 million.
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Mahindra and Mahindra (M&M) will set up a utility assembly plant in Manuas, North Brazil, with local partner Bramont. In Egypt, the company will assemble Scorpios under the CKD operation with local partner Bavarian Motors.
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Tata Motors, have ventured into Saudi Arabia's passenger car market with the launch of its three car models-- Tata Indica, Tata Indigo and Tata Marina.
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TVS Motor Company has set up a two-wheeler manufacturing plant in Indonesia at Surya Cipta Estate in Karawang.
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Maruti Udyog Ltd has been able to capture about 60 per cent of the small car market in Indonesia with an export order worth 12,000 units, 1,000 units more than what the company had said in June.
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Tata Motors acquired a Nissan facility in Pretoria, S. Africa which would allow it to roll out Tata vehicle for both South African and European market.
Testing and Certification Indian expertise in the automotive sector is coming handy for global car companies like Japanese manufacturers Nissan, Toyota and Honda and the German luxury car makers like BMW and Volkswagen to test their vehicle performance and get international certification. These car makers are negotiating with the National Automotive Testing and R&D Infrastructure Project (NATRIP) to take on the rigorous robustness and performance tests of their future vehicles intended for both overseas as well as the Indian market.
Funded by the Union Government, NATRIP's centre at Manesar, in Haryana, began operations recently to carry out homologation tests. It also has centres at Oragadam near Chennai, and Vehicle Research & Development Establishment near Pune. Going forward, the organisation plans to open three more centres in Silchar, Rai Bareily and Indore. Global car makers such as BMW, Nissan, Toyota, and Honda are in talks with NATRIP, to avail themselves of its facilities for testing the durability and performance of their vehicles for the global market. Auto-makers like Maruti Suzuki India and Hyundai Motors India, which together produce over 70 per cent of the cars manufactured in India, have also shown keen interest to get their vehicles tested and homologated. In the driver's seat India has made a mark in the global automobile industry; the salient aspects below make for India featuring on every leading automobile player's roadmap.
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India is the second largest two-wheeler market in the world Fourth largest commercial vehicle market in the world 11th largest passenger car market in the world Fifth-largest bus and truck market in the world (by volume) Envisaged to be the 7th largest automobile market by 2016, and world's 3rd largest by 2030 (behind only China and the US)
CHAPTER THREE
COMPANY ANALYSIS
The companies studied include ‘Tata Motors’ and ‘Ashok Leyland’Tata motors is a player in the passenger as well as the commercial vehicle segment. Ashok Leyland is in the medium and heavy commercial vehicle segment.
He technique used to value the company stock is discounted cash flows (DCF). A stock can be valued using DCF by two ways. They are:
o FCFF- Free cash Flow to firm o FCFE- Free cash Flow to Equity
This study is conducted using the FCFE approach.. The WACC is used to discount the cash flows. The cost of equity capital is determined by CAPM (Capital asset Pricing Model) The cost of debt is taken as the prevailing rates in the market.
Having projected the company's free cash flow for the next five years, we want to figure out what these cash flows are worth today. That means coming up with an appropriate discount rate which we can use to calculate the net present value (NPV) of the cash flows.
The WACC is essentially a blend of the cost of equity and the after-tax cost of debt.so, we need to look at how cost of equity and cost of debt are calculated.
Cost of Equity Unlike debt, which the company must pay at a set rate of interest, equity does not have a concrete price that the company must pay. But that doesn't mean that there is no cost of equity. Equity shareholders expect to obtain a certain return on their equity investment in a company. From the company's perspective, the equity holders' required rate of return is a cost, because if the company does not deliver this expected return, shareholders will
simply sell their shares, causing the price to drop.
Therefore, the cost of equity is basically what it costs the company to maintain a share price that is satisfactory (at least in theory) to investors. The most commonly accepted method for calculating cost of equity comes from the Nobel Prize-winning capital asset pricing model (CAPM), where:
Cost of Equity (Re) = Rf + Beta (Rm-Rf)
The elements of the formula are:
Rf - Risk-Free Rate This is the amount obtained from investing in securities considered free from credit risk, such as government bonds from developed countries. The interest rate of Treasury bills or the long-term bond rate is frequently used as a proxy for the risk-free rate.
ß – Bet This measures how much a company's share price moves against the market as a whole. A beta of one, for instance, indicates that the company moves in line with the market. If the beta is in excess of one, the share is exaggerating the market's movements; less than one means the share is more stable. Occasionally, a company may have a negative beta (e.g. a gold mining company), which means the share price moves in the opposite direction to the broader market.
(Rm – Rf) Equity Market Risk Premium The equity market risk premium (EMRP) represents the returns investors expect, over and above the risk-free rate, to compensate them for taking extra risk by investing in the stock market. In other words, it is the difference between the risk-free rate and the market rate. It is a highly contentious figure. Many commentators argue that it has gone up due to the notion that holding shares has become riskier.
Once the cost of equity is calculated, adjustments can be made to take account of risk factors specific to the company, which may increase or decrease the risk profile of the company. Such factors include the size of the company, pending lawsuits, concentration of customer base and dependence on key employees. Adjustments are entirely a matter of investor judgment and they vary from company to company.
Cost of Debt Compared to cost of equity, cost of debt is fairly straightforward to calculate. The rate applied to determine the cost of debt (Rd) should be the current market rate the company is paying on its debt. If the company is not paying market rates, an appropriate market rate payable by the company should be estimated.
As companies benefit from the tax deductions available on interest paid, the net cost of the debt is actually the interest paid less the tax savings resulting from the tax-deductible interest payment. Therefore, the after-tax cost of debt is
Rd (1 - corporate tax rate)
Capital Structure
The WACC is the weighted average of the cost of equity and the cost of debt based on the proportion of debt and equity in the company's capital structure. The proportion of debt is represented by D/V, a ratio comparing the company's debt to the company's total value (equity + debt). The proportion of equity is represented by E/V, a ratio comparing the company's equity to the company's total value (equity + debt). The WACC is represented by the following formula:
WACC = Re x E/V + Rd x (1 - corporate tax rate) x D/V.
A company's WACC is a function of the mix between debt and equity and the cost of that debt and equity. On the one hand, in the past few years, falling interest rates have reduced the WACC of companies. On the other hand, corporate disasters like those at Enron and WorldCom have increased the perceived risk of equity investments.
TATA MOTORS With the launch of nana as the commom man’s car tata is all set to steal the show.It has made it possible to own a car in one lac. The company is going for heavy investment to keep up with the future demands. Table 11 Lates results and shareholding pattern Latest Results (Rs Cr) 200712 Period-Ended Sales 7251.83 Other Income 180.5 PBIDT 985.56 PBDT 832.61 PBIT 818.05 PBT 665.1 RPAT 499.05 EPAT 48.77 APAT 450.28 CP 666.56 Shareholding Pattern (as on 31-Dec-2007) Foreign Institutions Govt Holding Non Promoter Corp. Hold. Promoters Public & Others Totals
200612 6895.75 100.78 954.55 852.24 811.05 708.74 513.17 0 513.17 656.67
Var. (%) 5.16 79.1 3.25 -2.3 0.86 -6.16 -2.75 NA -12.26 1.51 (%) 37.79 17.01 0.11 1.07 33.42 10.61 100
Shares 145692152 65587919 407181 4136901 128817405 40862396 385503954
Based on the equity research of tata security the suggestion for the investor is to sell the security. Intrinsic value of the security is Rs206.67 and the market price is Rs 635.75, on 3rd of april 2008.as the share is overpriced it is advisable to sell it as ther exists a wide gap between the intrinsic value and the market price.
Valuation of the stock
Market return -is 28.62 % Beta of the security is 1.2 WACC is 6% Cost of equity (Ke) = 34% Cost of debt (kd) is 6.37% The cost of equity is calculated with CAPM formula. Intrinsic value of the security is calculated by using the ‘Free cash flow approach to Firm’.In this approach of DCF,
Intrinsic values of a share is equal to the present values of all the future cash flows during the forecast period plus the present value of terminal value ( that is the PV of cashflows after the explicit forecast period. Sell decision The free cash flows amount to Rs 811720.1 crores. The intrinsic value comes to Rs 206.67per share, whereas the market price is Rs 206.67 Per share.So, the share is overpriced and the gap is quite large. So sell decision makes sense.
The future prospects are quite bright and auto sector which is supported heavily by the govt. and so company is looking for further growth and expansion.
ASHOK LEYLAND LTD
Ashok Leyland is one among the major player in the domestic commercial vehicle segment.the company is set to gear up for the future growth. It is planning increase in investment son a large scale.
BSE Group: A
BSE Code: 500477
Industry: Automobiles -LCVs / HCVs Bloomberg Code: AL@IN Reuters Code: ASOK.BO NSE Code: ASHOKLEY BSE Group: A Group: Hinduja
Table 12 Latest results Latest Results (Rs Cr) Period-Ended 200712 200612 Var. (%) Sales Other Income PBIDT PBDT PBIT PBT RPAT EPAT APAT CP 1800.08 1777.59 1.27 43.7 207.9 192.65 165.07 149.82 120.22 -1.28 121.5 161.05 6.35 188.34 185.78 153.86 151.3 105.26 -2.06 107.32 138.49 588.19 10.39 3.7 7.29 -0.98 14.21 -37.86 13.21 16.29
Table 13 Share holding Pattern for Ashok leyland
Shareholding Pattern (as on 31-Dec-2007) Foreign Institutions Govt Holding Non Promoter Corp. Hold. Promoters Public & Others Totals Share Price Graph Shares 393622257 211548508 1109360 45808634 513618712 164630846 (%) 29.59 15.9 0.08 3.44 38.61 12.38
1330338317 100
Valuation of the stock Market return -is 28.56 % Beta of the security is 1.105 WACC is 10 % Cost of equity (Ke) = 30% Cost of debt (kd) is 8% The cost of equity is calculated with CAPM formula. Intrinsic value of the security is calculated by using the ‘Free cash flow approach to Firm’ .In this approach of DCF,the Wacc during the the forecast period plus the present value of terminal value that is the PV of cashflows after the explicit forecast period. The free cash flows amount to Rs 811720.1 crores.
Hold decision The intrinsic value comes to Rs 28.32 per share, whereas the market price is Rs 34.65 Per share.So, the share is overpriced but since there is potential looking at the future of the auto sector and since the gap is a smaller one(Rs 6.28) the decision is to hold.
Key Assumptions and bases for valuation
Increase in investments by the auto majors due to the positive trend in the sector ,both locally as well as globally. This is due to a number of reasons including strict norms as for the freight carrying capacity, development of infrastructure, the golden quadrilateral programmmeetc as discussed in the report earlier. Increased innovation and technological development and hence need for a strong R&D at the company level.So further need for investments.
Pressure on prices due to tough local and global competition will initially shrink margins though may increase the sales. For forecasting the future performance of the companes the assumptions made are: Profit and loss a/c prepared based on
o Informtion and data about industry, and individual company in addition to that of the economy. o Average of the past five to six years used to arrive at forecated figures. o Elements of the P&l a/c are based as an average percent of past five year sales. o The sales growth is taken in the range of 30 -38%
Recommendations
Investors seeking long benefit can safely go for the investment in auto sector as the future prospects are quite bright. Sell tata share Hold Ashok Leyland share
Limitations Fundamental analysis is based on fundamentals of a company,but since an attempt is to value the future cashflows , there is a need to forecast. And so the study can be biased and may not have hundred percent accuracy.
Industry data and figures for each and every component are not available and so the results are affected.
Tables
Type of Vehicle Taxi Trucks Buses Three Wheelers Two Wheeler Car Total Commercial Use Vehicles Total Private Use Vehicles 7967 24577 199517 228030 68220 427547 Mumbai 35676 Kolkata 19588 50089 6903 5841 147603 157142 82421 304745 Chennai 9026 17976 7810 16407 286856 96598 51219 383454 Bangalore 2604 20822 7250 22837 281899 54746 53513 336645 Hyderabad 1320 22038 2384 20015 343433 30447 45757 373880 Delhi* 0 0 0 0 867404 236549 0 1103953 Ahmedabad 2671 6083 10564 25029 143695 22950 44347 166645
* Vehicles for Commercial Use in Delhi have already been phased out as per Supreme Court orders. Based on 50% of Excise Duty and Sales Tax rebate, the total cost of incentive to Central and State Governments and income generated from the project is estimated as given below: (Rs Crores) Scrapped Vehicle Population Commercial Use 68220 82421 51219 53513 45757 0 44347 345477 Private Use 427547 304745 383454 336645 373880 1103953 166645 3096869 Cost of Incentives Excise Duty 901 844 510 373 283 918 194 4023 Sales Tax 505 543 326 257 209 510 141 2493 Total 1406 1387 836 630 492 1428 335 6516 Income Generated from Project Modernfleet Excise Duty 901 844 510 373 283 918 194 4023 Sales Tax 505 543 326 257 209 510 141 2493 Total 1406 1387 836 630 492 1428 335 6516
City
Mumbai Kolkata Chennai Bangalore Hyderabad Delhi* Ahmedabad Total
* Vehicles for Commercial Use in Delhi have already been phased out as per Supreme Court orders. Source SIAM proposal on Project Modern Fleet submitted in July 2002
Assuming that all vehicles sold under the programme are replacements and as such additional sales, over and above the normal sale, there will be a revenue positive impact.
REFRERENCES
websites 1) http://www.indiabusiness.nic.in/ 2) http://www.india.gov.in
3) http://www.ibef.org 4) http://finmin.nic.in
5) [email protected]
Books 1) P Chandra, Financial management Theory and practice, Tata Mcgraw Hill,2006 2) R Palat, Fundamental Analysis for Investors,Vision books,1994 3) Bodie, Kane, Marcus, Mohanty, Investments, Tata Mcgraw HillPublishing company Limited, 2006
Capitaline Software
doc_841791053.pdf
The automotive industry is a term that covers a wide range of companies and organisations involved in the design, development, manufacture, marketing, and selling of motor vehicles, towed vehicles, motorcycles and mopeds. It is one of the world's most important economic sectors by revenue.
GRAND PROJECT ON FUNDAMENTAL ANALYSIS FOR SECURITY SELECTION IN AUTOMOBILE SECTOR
AESPGIBM GUJARAT UNIVERSITY (2006-08)
BY : JIGISHA P. AAGJA
CERTIFICATE
This is to certify that Ms. Jigisha P. Aagja has successfully completed her Grand Project titled “Fundamental Analysis for security selection in Automobiles sector” under the guidance of Prof. Falguni Pandya for the partial fulfillment of the M.B.A. program (batch 2006-2008) from AES Post Graduate Institute of Business Management, Gujarat University.
----------------------------
----------------------------
Executive Director Dr. A. H. Kalro
Project guide Prof. Falguni Pandya
Date: Place: Ahmedabad
ACKNOWLEDGEMENT
I am thankful to God for successfully completing this project study.It was a good experience. I thank Dr A H Kalro (executive director) for providing the opportuinity as well as the support facilities for the project study.I also thank Dr. Parag Sanghani and Prof Taral pathak for their guidance.The assistance and support of my guide, Prof. Falguni Pandya is worth appreciating.
I am happy to have a supportive family to encourage me .
The study was based on secondary data.The tools used were EIC framework ( Econmy- Indutry-Company analysis ),Free cash flow method of discounting to determine the intrinsic value of the security.
TABLE OF CONTENTS
TOPIC
PAGE NO. ii iii iv
Certificate Acknowledgement Executive Summary
Chapter 1 1.1 Introduction 1.2 Global Economy –Part One 1.2.1 Developments during 2006 1.2.2 developments during 2007 1.3 Indian Economy – Part Two 1.3.1 Macroeconomic Indicators 1.3.2 Sectoral Contribution 10 13 2 6 1
Chapter 2 2.1 India’s Position 2.2 Background of automobile sector 2.3 Pull & Push Effect 2.4 Auto Units and regional clusters 2.5 SWOT Analysis 25 27 30 32 47
TOPIC
PAGE NO. 53 68
2.6 Porter’s Diamond Model 2.7 Highlights of Union Budget
Chapter 3 Company Analysis 3.1 Introduction 3.2 Tata Motors 3.2.1 Company Information 3.2.2 Company valuation 3.3 Ashok Leyland Limited 3.3.1 Company Information 3.3.2 Company valuation 3.4 Key Assumptions and bases for valuation 3.5 Recommendations and limitations 95 96 106 107 84 85 81
Appendices References
108 111
CHAPTER 1
INTRODUCTION
SECURITY ANALYSIS Analysis of a security can be done chiefly by two ways. They are fundamental analysis and technical analysis. Fundamental Analysis It is concerned with the fundamentals affecting a security. It is based on the premise that the share should be purchased when it is available below its intrinsic value and sell when when its market price rises beyond it intrinsic value. It holds that in the short run the market price deviates from the inrinsic value of the share but in the long run both will be equal. Technical analysis It is a charting technique used to trade in securities.It seks to amswer questions as the trend in price and likelihood of a reversal.
Various models used in fundamental analysis are dividend models ,ratio analysis , discounted cash flow approach. Fundamental analysis through EIC (Economy –Industry –Company ) approach begins with the study of the macro economy.
MACROECONOMY
PART ONE : GLOBAL ECONOMY
The world economy is divided into advanced economies, emerging and developing economies and underdeveloped economy.
Developments during 2006
Growth at the global level The global economy continued on high growth path with a 5.4 per cent growth during 2006 achieving a four year spell of a sustained growth of over 4 per cent that began in 2003.The broad-based expansion in world output could be explained in terms of a resilient US consumption, despite some slowdown in growth in the second half of the year, a broad-based upswing in Europe and Japan and other advanced industrial countries, and continued rapid growth in emerging market economies (EMEs) particularly, China (11.1 per cent), India (9.4 percent) and Russia (6.7 per cent).
The growth in the world output was led by emerging economies which contributed 3.9 per cent to the world GDP growth in 2006, while the advanced economies contributed 1.5 per cent. Growth in the euro area exceeded that in the United States in the second half of last year, for the first time since 2002. In the EMEs, growth continued to remain firm on account of availability of financial resources, strong commodity prices and abundant global liquidity. Concerns have, however, arisen regarding the sustainability of some of these factors. Economic activity in Japan slowed in the middle of 2006, but recovered by the end of the year.
Inflation As output in many countries seemed close to potential, strong demand, in conjunction with strong gains recorded by global commodity prices, was reflected in some inflationary pressures in major economies. Global headline inflation closely tracked movements in energy prices –rising above 3 per cent in the first half of 2006 on the back of rising oil prices, before dropping sharply as energy prices declined towards the end of the year. The consumer price inflation in advanced economies was 2.3 per cent in the calendar year 2006, the same as a year earlier, but higher than that of 1.9 per cent during the preceding 5-year period (2000-04). Inflation in ‘developing Asia’ rose from 2.6 per cent during 2000-04 and 3.6 per cent in 2005 to 4.0 per cent in 2006.
Tightening of monetary policy With headline inflation crossing the targets / comfort zones in major countries, many central banks pursued monetary tightening to contain inflationary expectations. Amongst the major advanced economies those that tightened their policies were – the US Federal Reserve Board (US Fed) the European Central Bank (ECB) the Bank of England, the Sveriges Riksbank (Sweden) the Reserve Bank of New Zealand the Reserve Bank of Australia & the Bank of Japan. Fiscal balances Fiscal balances in advanced industrial countries showed signs of improvement in 2006.Measures of structural budget deficits, which attempt to remove cyclical effects from headline deficit figures, declined as follows : United States - by over 1 percentage point of potential GDP Germany Japan - by 0.8 percentage points - by 0.5 percentage points, (largely due to one-off
Changes in capital transfers) & Italy - marginally increased
Change in German headline balances was even more pronounced, with the deficit decreasing by 1.8 percentage points in 2006. Credit While the credit conditions turned tight in the United States, the expansion has continued in most other areas. As a result, global asset prices either continued to rise or were maintained at unusually high levels. Most Asian EMEs have recorded strong growth with reasonably well anchored inflation expectations aided by strong global demand for their exports favourable terms of trade easy access to external financing comfortable foreign currency reserves along with reduced external debt as percent of GDP.
Banking systems of EMEs Their banking systems have also been strengthened through improved restructuring and supervisory systems. The resilience to external shocks is reinforced by a combination of the following –
lower balance sheet exposure to exchange rate risks lower refinancing risks in debt structures, strong financial systems and greater policy flexibility But there are areas of concern and many of these countries have felt the need for containing excess volatility in foreign exchange markets through intervention accompanied by sterilisation. But, such policies have their own limitations and such
actions have also been accompanied by differing strategies for liquidity management including – raising cash reserve requirements, issuances of central bank securities, ceilings on lending to specific sectors and the use of prudential tools. International Financial markets In international financial markets, prices of risky assets continued to rise throughout most of 2006 and early 2007. A number of equity markets reached historical highs, while various credit spreads touched new lows. Government bond yields In the advanced industrial countries such yields leveled off around mid-2006 and then began to move downwards. Long term bond yields particularly in the United States, set on a downward trend during the second half of the year, reflecting investor concerns about US growth prospects and expectations of easing monetary policy. Japan & Europe The economic outlook in Japan remained more positive, lending some support to bond yields, while the economic outlook for the euro area brightened progressively and eventually brought about rising euro bond yields. Equity & credit markets An important factor behind the gains in developed equity and credit markets was continued strong earnings growth. Also, ongoing changes in capital structure boosted equity markets, as share buybacks rose further , while merger and acquisition activity grew substantially. Similarly, gains in emerging markets coincided with improved credit ratings and genereraly strong macroeconomic conditions.
Performance of financial firms The strong overall performance of financial firms in advanced industrial countries continued during the year, and banks benefited from another year of a generally benign credit environment and strong retail business. Investment banks registered record profits driven by growth in capital market activity and a boom in private equity. Investor inflows into hedge funds were moderate as compared with the previous years, in response to the declining rates of return registered by the funds. Current profits add to already healthy capital cushions, suggesting that financial firms are well placed to withstand the likely sources of strain over the near term.
Developments during 2007
GDP growth rate World GDP growth, which had accelerated to 5.4 per cent in 2006, maintained pace in the first half of 2007 and appears to have broadened across industrial and emerging market countries.According to the World Economic Outlook (WEO) of the International Monetary Fund (IMF) released in October 2007, global real GDP growth was expected to decline from 5.4 per cent in 2006 to 5.2 per cent in 2007 and further to 4.8 per cent in 2008. Although growth in the United States slowed in the first quarter of 2007, preliminary estimates suggest that it rebounded in the second and third quarters. Activity in most othercountries continued to expand strongly. In the euro area and Japan, growth has remained above trend with some welcome signs that domestic demand is taking a more central role in the expansions. Emerging market countries have continued to expand robustly, led by rapid growth in China, India and Russia.
Inflation Headline inflation in major advanced economies generally edged up towards the end of the third quarter of 2007, mainly reflecting hardening of food and fuel prices in the US, and clothing and education in the euro area.
On the other hand, headline inflation in the UK eased towards the end of third quarter largely due to lower domestic energy price inflation before picking up again in October 2007. Amongst major economies, headline inflation in October 2007 was 3.5 per cent in the US, 2.1 per cent in the UK and 2.6 per cent in the euro area. Inflation was 2.2 per cent in the OECD countries in September 2007 as compared with 2.0 per cent a year ago.Core inflation remained firm in major economies, reflecting strong demand conditions.
Global credit markets Global credit markets have experienced large volatility since May 2007 as uncertainties about the size and distribution of losses from the US sub-prime mortgage lending made investors to adjust their positions. Since late 2006 , conditions in the sub-prime mortgage market sector in the US have deterio-rated significantly resulting in reassessment of risk by investors across products and markets. The losses, thoughlargely concentrated in the US, were dispersed quickly to European and Asian investors holding asset backed securities and collateralised debt obligations. Within Asia, exposure was reported to be concentrated in Japan, China, Taiwan Province of China, South Korea and Australia.
Short-term rates Hardened Short-term rates hardened further in a number of economies, moving broadly in tandem with policy rates. Several central banks such as the Bank of England, People’s Bank of China, Reserve Bank of New Zealand raised their policy rates further during the quarter ended September 2007 to contain inflation and stabilise inflationary expectations. Softened On the other hand, short-term interest rates in the US declined, reflecting cut in the fed funds target rate by 75 basis points to 4.5 per cent by October 31, 2007. The rate cut in the US on September 18, 2007 was the first after a series of 17 consecutive rate hikes by
the Federal Reserve that commenced from June 2004 to June 2006 followed by a pause up to August 2007. Short term rates eased in a few EMEs such as Brazil and Thailand, as central banks in these countries continued to cut policy rates to support growth.
Long-term Government bond yields In contrast to short-term interest rates, long-term Government bond yields softened in major advanced economies during the second quarter of 2007-08, reversing the increasing trend observed in the first quarter. Decline in the bond yields reflected lower investor appetite for riskier assets in the event of deteriorating housing market and turmoil in the credit market. Between end- March 2007 and November 19, 2007, 10-year yield declined by 35 basis points in the US, and 17 basis points in UK and 15 basis points in Japan, while it increased by 11 basis points in the Euro area.
Global Equity Markets Global equity markets recorded further gains during Q3 2007, amidst intermittent corrections. Robust corporate earnings, buoyant merger and acquisition activity and increased risk appetite buoyed the equity markets in major emerging economies such as China (69.8 percent ) Hong Kong (30.7 per cent) Indonesia (28.5percent) Thailand (21.3 per cent) However, factors like slump in the US home sales and rising concerns about the US mortgage and corporate lending markets, increase in international crude oil prices, surge in China’s inflation rate and contraction in Japan’s economy intermittently dampened the market sentiment. South Korea (32.2 per cent) Brazil (28.7 percent) Turkey (25.1 per cent)
Foreign Exchange US In the foreign exchange market, the US dollar depreciated against major currencies upto September 14, 2007, reflecting worries in the mortgage market, falling housing sales and weakening consumer confidence. While the pound sterling strengthened against the US dollar and reached a 25-year high level in July 2007, Japanese yen appreciated against US dollar as a result of unwinding of yen carry trade.
PART 2: INDIAN ECONOMY Macro Economic indicators GDP The Indian economy continued to record strong growth during 2006-07. Real gross domestic product (GDP) growth rate accelerated to 9.4 per cent during 2006-07 from 9.0 per cent level in the previous year contributed mainly by the sustained expansion in industry and services. Real GDP growth during the Tenth Plan period (2002-03 and 2006-07) averaged 7.6 per cent – the highest average rate of growth during any plan period so far. Projected GDP growth rate : GDP at current market prices is projected at Rs. 46,93,602 crore in 2007-08 by the Central Statistical Organisation (CSO) in its advance estimates (AE) of Gross Domestic Product. In the current fiscal year, the size of the Indian economy at market exchange rate will cross US$ 1 trillion at the nominal exchange rate (average of April-December 2007) GDP is Projected to be US$ 1.16 trillion in 2007-08. The economy has moved to a higher growth plane, with growth in GDP at market prices exceeding 8 per cent in every year since 2003-04. The projected economic growth of 8.7 per cent for 2007- 08 is fully in line with this trend. There was an acceleration in domestic investment and saving rates to drive growth and provide the resources for meeting the 9 per cent (average) growth target of the Eleventh Five-Year Plan. Macroeconomic fundamentals continue to inspire confidence and the investment climate is full of optimism. Buoyant growth of government revenues made it possible to maintain
fiscal consolidation as mandated under the Fiscal Responsibility and Budget Management Act (FRBMA). The decisive change in growth trend also means that the economy was not fully prepared for the different set of challenges that accompany fast growth.
Inflation flared up in the last half of 2006-07 and was successfully contained during the current year, despite a global hardening of commodity prices and an upsurge in capital inflows. Raising growth to double digit will require additional reforms, because of the following concern areas : An appreciation of the rupee A slowdown in the consumer goods segment of industry The infrastructure (both physical and social) constraints
Per capita Income & Per capita consumption ( at constant prices1900-2000) - an indicator of public welfare The pace of economic improvement has moved up considerably during the last five years (including 2007-08). Per capita income Period of 1980-81 to 91- 92 : The rate of growth of per capita income as measured by per capita GDP at market prices (constant 1999-2000 prices) grew by an annual average rate of 3.1 per cent during the 12year period, 1980-81 to 1991-92.
Period of 1992-93 to 2002-03 : It accelerated marginally to 3.7 per cent per annum during the next 11 years, 1992-93 to 2002-03. Since then there has been a sharp acceleration in the growth of per capita income, almost doubling to an average of 7.2 per cent per annum (2003-04 to 2007-08). This means that average income would now double in a decade, within one generation, instead of after a generation (two decades). Projected growth rate in per capita GDP for 2008-09 : The growth rate of per capita income in 2007-08 is projected to be 7.2 per cent, the same as the average of the five years to the current year. Per capita income at nominal exchange rate is estimated at US$ 1,021 India – in low income category : According to the World Bank system of classification of countries as low income, middle income and high income, India is still in the category of low income countries.
Per capita consumption Per capita private final consumption expenditure has increased in line with per capita income. Period of 1980-81 to 1991-92 & 1992- 93 to 2002-03 : The growth of per capita consumption accelerated from an average of 2.2 per cent per year during the 12 years from 1980-81 to 1991-92 to 2.6 per cent per year during the next 11 years following the reforms of the 1990s. The growth rate has almost doubled to 5.1 per cent per year during the subsequent five years from 2003-04 to2007-08. Projected growth rate for 2007-08 : The current year (2007 -08) growth is expected to be 5.3 per cent, marginally higher than the last five year average.
Consumption & saving – comparative rates : The average growth of consumption is slower than the average growth of income, primarily because of rising saving rates, though rising tax collection rates can also widen the gap (during some periods). Year to year changes in consumption also suggest that the rise in consumption is a more gradual and steady process, as any sharp changes in income tend to get adjusted in the saving rate. Sectoral Contribution The deceleration of growth in 2007-08 is generally spread across most of the sectors except Electricity Community services and The composite category -“trade, hotels, transport & communications”
The deceleration in the growth of the agriculture sector is attributed to the slackening in the growth of rabi crops. Manufacturing and construction , which grew at 12 per cent in 2006-07, decelerated by about 2.5 percentage points in 2007-08. The slower growth of consumer durable was the most important factor in the slowdown of manufacturing. Cement and steel, the key inputs into construction, grew by 7.4 per cent and 6.5 per cent respectively, during April-November 2007-08, down from 10.8 per cent and 11.2 per cent in the previous year, dampening the growth in the construction sector. There was also a deceleration in the growth of revenue earning freight traffic by railways, passengers handled at airports, and bank credit in April-November 2007-08, which formed the basis for the full year assessment.
The average growth of manufacturing during the five years ending 2007-08 is expected to be about 9.1 per cent. Manufacturing Sector Agriculture & allied activities Real GDP originating from agriculture and allied activities estimated by the Central Statistical Organisation (CSO) registered a lower growth of 2.7 per cent during 2006-07 than that of 6.0 per cent in the previous year. Industry The growth of real GDP originating from industry entered the fifth year of expansion as it recorded a double-digit growth of 11.5 per cent during the year (8.2 per cent in 2005-06), which was the highest growth achieved since 1995-96. While industrial growth was mainly driven by the manufacturing sector, both mining and electricity sectors witnessed accelerated growth. In terms of use-based classification, the performance of the capital goods sector was particularly impressive with 18.2 per cent growth. The basic goods and consumer goods sector also recorded a double digit growth of 10.3 per cent and 10.1 per cent, respectively , during 2006-07. The well-performing industrial sector was also boosted by improved performance of the infrastructure sector, registering 8.8 per cent growth during 2006-07. Table 1 Rate of growth of GDP at factor coat at 1999-2000prices (%)
Service Sector The services sector recorded double-digit growth consistently in the last three years. It grew by 11.0 per cent during 2006-07 on top of 10.3 per cent growth in 2005-06, which has been the highest growth since 1999-2000 as per the new series. Contribution of the auto sector to the GDP
The auto sector to the country's gross domestic product is expected to increase to more than 10 per cent by 2016, compared with 3-4 per cent at present. Keeping in mind the shift of manufacturing base from developed countries to emerging economies, the automotive mission plan envisages fiscal and policy modulation with a focus on exports. Inflation High levels of capacity utilisation in a number of industries, along with supply shocks from primary articles, were reflected in a rise in the inflation rate during 2006-07. Headline inflation, measured by year-on-year variations in the wholesale price index (WPI), rose to 5.9 per cent on March 31, 2007 remaining generally above the upper end of the Reserve Bank’s indicative projections of 5.0-5.5 per cent between mid-November 2006 and end-March 2007.Headline inflation moved in a range of 3.7-6.7 per cent during 2006-07; the average WPI inflation moved up to 5.4 per cent during 2006-07 from 4.4 per cent a year ago. Among the major groups, prices of primary articles exerted upward pressure on inflation during 2006-07, reflecting shortfalls in domestic supply of major agricultural crops. Fuel group inflation, which had dominated the inflation outcome during the preceding two years, eased significantly during the second half of the year to reach its lowest rate in over a decade.
Measures of consumer price inflation remained above the wholesale price inflation throughout 2006-07, mainly reflecting the impact of elevated food prices.
Fiscal Position The ongoing improvement in the fiscal position was reflected in lower estimates of key deficit indicators of the Central and State Governments in the revised estimates (RE) visà-vis the budget estimates for 2006-07. As per provisional accounts, the revenue deficit of the Central Government estimated at Rs. 80,410 crore or 1.9 per cent of GDP was lower than 2.1 per cent of GDP in the budget estimates for 2006-07and 2.6 per cent in 2005-06. The gross fiscal deficit (GFD) for 2006-07 at Rs.1,42,793 crore constituted 3.5 per cent of GDP as against the budget estimates of 3.8 per cent and 4.1 per cent in the previous year. The improvement in key fiscal indicators was enabled by the sustained buoyancy in tax revenue and containment of growth in Plan expenditure. Reflecting the process of fiscalconsolidation, the outstanding domestic liabilities of the Central Government declined to 61.5 per cent of GDP at end-March 2007 (RE) from 63.4per cent at endMarch 2006 Money supply The year-on-year increase in broad money (M3) accelerated to 21.3 per cent at endMarch 2007 from 17.0 per cent a year ago and remained above the growth rate of 15.0 per cent projected in the Annual Policy Statement in April 2006. Demand for commercial credit remained strong during 2006-07 for the third successive year, but with some moderation Bank credit The annual growth in bank credit to the commercial sector at 25.4 per cent as on March 31, 2007 was lower than 27.2 per cent a year ago. Commercial banks’ credit to Government increased by Rs.74,238 crore as against a decline of Rs 19,514 crore in the previous year, whereas net RBI credit to Government declined by Rs. 2,384 crore as against an increase of Rs.35,799 crore in the preceding year.
The banking sector’s net foreign exchange assets increased by 25.7 per cent (Rs.1,86,985 crore), primarily reflecting the increase in net foreign exchange assets of the Reserve Bank by 28.7 per cent (Rs.1,93,170 crore). Liquidity The Reserve Bank continued to take measures to increase depth and liquidity in the money, the Government securities and the foreign exchange markets during the year. Financial markets generally remained orderly during most of 2006-07 with some spells of volatility, especially in March 2007 reflecting large capital flows and swings in Government of India’s cash balances coupled with high credit demand. Interest rates in the various segments of the financial market hardened in tandem with the policy rate of the Reserve Bank. During 2006-07, the financial markets shifted from conditions of easy liquidity to occasional spells of tightness necessitating injection of liquidity through the LAF. The total overhang of liquidity under the LAF, the market stabilisation scheme (MSS) and surplus cash balances of the Central Government taken together increased from an average of Rs.74,334 crore in March 2006 to Rs.92,849 crore in September 2006. With liquidity shortages getting accentuated in the second half of March 2007 in the wake of advance tax payments, net LAF injections rose to a peak of Rs.43,075 crore on March 21, 2007.
Stock Markets The stock markets reached record highs during the year 2006-07 interspersed with periodic corrections. The primary market segment of the capital market continued to exhibit buoyant conditions. The BSE Sensex at end-March 2007 increased by 15.9 per cent (year-on-year) on top of the increase of 73.7 per cent a year ago. Strong corporate profitability and continued liquidity support from foreign institutional investors and domestic mutual funds buoyed up the stock markets even as they witnessed sharp corrections on a few occasionsy markets.
Forex Market In the foreign exchange market, the Indian rupee exhibited two-way movements in the range of Rs.43.14 – 46.97 per US dollar during 2006 - 07 with a strengthening bias from mid-July 2006. The rupee initially depreciated against the US dollar during the year, reaching Rs.46.97 on July 19, 2006, reflecting higher crude oil prices and FII outflows. The rupee, however, strengthened thereafter on the back of moderation in crude oil prices, large capital inflows and weakness of the US dollar in international markets to reach Rs.43.14 per US dollar on March 28, 2007. The exchange rate was Rs.43.60 per US dollar at end-March 2007. Balance of Payments India’s balance of payments position indicated sustained strength and vibrancy in the external sector during 2006-07, reflecting the robust macroeconomic fundamentals. The growth in merchandise export and non-oil import moderated from the strong growth in the previous year. Earnings from exports of software and other business services as well as remittances from Indians working abroad continued to exhibit buoyancy. The net surplus under invisibles expanded further during 2006-07 and continued to finance a large part of the growing merchandise trade deficit. Consequently, the current account deficit remained modest during the year, and, as a proportion of GDP, was at the same level (1.1 per cent) as a year ago. Led by foreign direct investment and external commercial borrowings (ECBs), capital flows (net) to India witnessed a large increase during 2006 07 on the back of strengthening of growth prospects, and buoyancy in domestic investment and import demand. Outward direct investment also witnessed a jump reflecting growing overseas acquisitions by Indian corporates. With net capital flows remaining in excess of the
current account deficit, the overall balance of payments recorded a significant surplus, which was mirrored in an accretion of US $ 47.6 billion to foreign exchange reserves during 2006-07. While the stock of external debt rose due to higher ECBs and nonresident deposits, net international liabilities fell, reflecting the continuous build-up of foreign exchange reserves, which rose to reach a level of US $ 199.2 billion by endMarch 2007.
Projected GDP growth rate The economy has moved to a higher growth plane, with growth in GDP at market prices exceeding 8 per cent in every year since 2003-04. The projected economic growth of 8.7 per cent for 2007- 08 is fully in line with this trend. There was an acceleration in domestic investment and saving rates to drive growth and provide the resources for meeting the 9 per cent (average) growth target of the Eleventh Five-Year Plan.
Raising growth to double digit will require additional reforms, because of the following concern areas : An appreciation of the rupee A slowdown in the consumer goods segment of industry The infrastructure (both physical and social) constraints
Contribution of the auto sector to the GDP The auto sector to the country's gross domestic product is expected to increase to more than 10 per cent by 2016, compared with 3-4 per cent at present. Keeping in mind the shift of manufacturing base from developed countries to emerging economies, the automotive mission plan envisages fiscal and policy modulation with a focus on exports.
Table 2
: Macro-economic Indicators of India
AUTO INDUSRTY ANALYSIS
GLOBAL SCENARIO
The automotive sector comprises the Original Equipment Manufacturers (OEMs) and auto component manufacturers. Globally , the automotive industry is recognised as a key component and driver of national economy. The global automotive industry is in the midst of a major structural transformation – • Among OEMs, global conglomerates are emerging, driven by mergers and alliances among manufacturers (eg : GM / Fiat / Suzuki; Ford / Volvo / Mazda). • Component manufacturers, or suppliers, are getting Tieriesed with Tier 1 supplier taking on the role of component aggregation and module supply/assembly, and component suppliers being relegated to tiers 2/3. • Relationships between OEMs and suppliers (especially Tier 1s ) are becoming increasingly collaborative.
The growth in passenger & commercial vehicles have reached a new recode of 66.46 million units in 2005-06.
OEMs are the industry's brand name auto manufacturers, such as Tata Motors, Maruti Suzuki, General Motors, Ford, Toyota, etc. The OEM definition in the automobile industry constitutes a federally-licensed entity required to warrant and / or guarantee their products, unlike "aftermarket" which is not legally bound to a government-dictated level of liability
INDIA’S POSITION
Indian Automobile Industry
Largest three wheeler market in the world 2nd largest two wheeler market in the world 4th largest passenger vehicle market in Asia 4th largest tractor market in the world 5th largest commercial vehicle market in the world
Exhibit 1
Manufacturing at a glance
BACKGROUND OFAUTO INDUSTRY
Automotive industry has universally emerged as an important driver in the economy.Although the automotive industry in India is nearly six decades old,until 1982,only three manufacturers tenanted the motor car sector . They were o M/s.Hindustan Motors, o M/s. Premier Automobiles and o M/s. Standard Motors Owing to low volumes, it perpetuated obsolete technologies and was out of sync with the world industry. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models. After the lifting of licensing in 1993, 17 new ventures have come up of which 16 are for manufacture of cars. This industry currently accounts for nearly 4% of the GNP and 17% 0f the indirect tax revenue. Extant Policy Before the removal of QRs with effect from 01-04-2001, the policy placed import of capital goods and automotive components under open general licence, but restricted import of cars and automotive vehicles in Completely Built Unit (CBU) form or in Completely Knocked Down (CKD) or in Semi Knocked Down (SKD) condition. Car manufacturing units were issued licences to import components in CKD or SKD form only on executing a Memorandum of Understanding (MOU) with the Director General Foreign Trade (DGFT). 11 companies signed MOUs with DGFT under which they agreed to:
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Establish actual production of cars and not merely assemble vehicles; Bring in a minimum foreign equity of US $ 50 Million if a joint venture involved majority foreign equity ownership;
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Indigenise components upto a minimum of 50% in the third and 70% in the fifth year or earlier from the date of clearance of the first lot of imports. Thereafter the MOU and import licensing will abate
Neutralise foreign exchange outgo on imports (CIF) by export of cars, auto components etc. (FOB). This obligation was to commence from the third year of start of production and to be fulfilled during the currency of the MOU. From the fourth year imports were to be regulated in relation to the exports made in the previous year. Current Status of Indian Automotive Industry The industry encompasses commercial vehicles, multi-utility vehicles, passenger cars, two wheelers, three wheelers, tractors and auto components. There are in place 15 manufacturers of cars and multi utility vehicles, 9 of commercial vehicles, 14 of Two/Three Wheelers and 10 of Tractors besides 5 of engines. With an investment of Rs.50,000 crores, the turnover was Rs. 59,500 crores in Automotive Sector during 19992000. It employs 4,50,000 people directly and 100,00,000 people indirectly and is now inhabited by global majors in keen contention.
India's automotive component industry manufactures the entire range of parts required by the domestic automobile industry and currently employs about 250,000 persons. Auto component manufacturers supply to two kinds of buyers – o original equipment manufacturers (OEM) o the replacement markrt Replacement market The replacement market is characterised by the presence of several small-scale suppliers who score over the organised players in terms of excise duty exemptions and lower overheads.
Original equipment manufacturers (OEM) The demand from the OEM market, on the other hand, is dependent on the demand for new vehicles. The auto sector (excluding Tractors) attained a steep cumulative annual growth of 22% between 1992 and 1997. The Tractors achieved a cumulative annual growth of 16%. Component production grew by 28%. There has been a slowdown in the automobile sector in the past two years. However, the component industry maintained a low but positive growth rate mainly due to its export performance. Over the years, the component industry has maintained a 10% - 12% share of exports in the total production. Roads occupy an eminent position in transportation as they, as per the present estimate, carry nearly 65% of freight and 87% of passenger traffic. Although, India has 3.3 million kilometers of road network, which is the second largest in the world, the Indian highways are getting overpopulated. Traffic management and road sense also need attention.
The pull & push effect on Indian automotive industry
Pull effect The following factors have made Indian economy an attractive market for global players, pulling them towards itself : Growth of Indian middle class with increasing purchasing power Strong growth of indian economy Market linked exchange rate Availability of trained manpower at competitive cost
Push effect Stagnation in developed economies like US, EU, Japan has resulted into : Forceful shifting of new capacities to India Capital flows to india So, the existence of attractiveness of indian economy pulls global players towards itself and repulsive features of developed economies which pushes the capital flows and investment to emerging indian economy have led to rise of foreign players in India auto sector. The trends affecting global auto industry have affected the Indian auto industry as well, leading to a rapid transformation of the auto industry over the last decade or so. After the end of licensing in 1993, with 100 % FDI being allowed in the year 2000 the industry has witnessed rapid growth in volumes and capacity, and 17 new ventures have come up in the last 10 years. These include Global giants such as General Motors Ford Toyota Honda Hyundai Fiat
Growth in auto sector The domestic automobile market has been growing at 14.2 per cent CAGR over the past 4 years (2000-01 to 2004-05), while the auto components market has been growing at 19.2 per cent CAGR (2000-01 to 2003-04). The industry (OEMs and suppliers together) contributed nearly 4 per cent tothe country’s GDP in 2003-04. Employment in auto sector The automotive sector also offers significant employment opportunities. It employs 0.45 million people directly and around 10 million people indirectly.
Attractiveness of Indian auto industry The industry’s capabilities in design, engineering and manufacturing have been recognised the world over, and most automotive majors are looking to increasingly source auto components from India. India is emerging as one of the most attractive automotive markets in the world, and is poised to become is poised to become a key sourcing base for auto component. The industry structure spans all segments and is concentrated in regional clusters. The India automotive sector has a presence across all vehicle segments and key components. It encompasses following segments commercial vehicles multi-utility vehicles passenger cars two wheelers three wheelers auto components
In terms of volume two wheelers dominate the sector, with nearly 80 per cent share, followed by passenger vehicles with 13 per cent.The industry had few players and was protected from global competition till the 1990s. After government lifted licensing in 1993, 17 new ventures have come up. At present, there are o 12 manufacturers of passenger cars, o 5 manufacturers of multi utility vehicles (MUVs), o 9 manufacturers of commercial vehicles, o 12 of two wheelers and 4 of three wheelers, besides o 5 manufacturers of engines. With the arrival of global players, the sector has become highly competitive.
Auto Manufacturing Units Automobile manufacturing units are located all over India. These are, however ,concentrated in some pockets Chennai and Bangalore in the south ,Pune in the west ,The National Capital Region (NCR, which includes New Delhi and its suburban districts) in the north Jamshedpur and Kolkata in the east Pithampur in the central region Regional clusters of auto components Following global trends, the Indian automotive sector also has most auto suppliers located close to the manufacturing locations of OEMs, forming regional automotive clusters. Broadly, the three main clusters are centered around Chennai Pune and the NCR.
Highly fragmented auto component sector : In terms of number of players The Indian automotive component industry is highly fragmented.There-are nearly 6,400 players in the sector, of which only about 6 per cent are organised and the remaining 94 per cent are small-scale unorganized players. In terms of value added The organised players account for nearly 77 per cent of the output in the sector. The sector manufactures components across all key vehicle systems. The breakup of the output from the organised sector, in value terms across key vehicle systems, is shown in the figure.
Exhibit : 2 key players
Table 3: Number of vehicles Produced
Production
Category Passenger Cars Utility Vehicles MPVs Total Passenger Vehicels M&HCVs LCVs Total Commercial Vehicles Three Wheelers Scooters Motor Cycles Mopeds Electric Two Wheelers Total Two Wheelers Grand Total 2001-02 500301 105667 63751 669719 96752 65756 162508 212748 937506 2002-03 557410 114479 51441 723330 120502 83195 203697 276719 848434 2003-04 782562 146325 60673 989560 166123 108917 275040 356223 935279 2004-05 960487 182018 67371 2005-06 2006-07
1046133 1238032 196506 66661 222111 84707
1209876 1309300 1544850 214807 138896 353703 374445 987498 219295 171788 391083 434423 294266 225734 520000 556124
1021013 943974
2906323 3876175 4355168 5193894 6207690 7112225 427498 351612 332294 348437 379994 379987 7982
4271327 5076221 5622741 6529829 7608697 8444168 5316302 6279967 7243564 8467853 9743503 11065142
Two wheelers, which constitute the majority of the industry volume, have been growing at a rate of 14.3 per cent, three wheelers at a rate of 14 per cent and passenger vehicles at a rate of 11.3 per cent. Commercial vehicles have been growing at a higher rate of nearly 23.5 per cent. The production and domestic sales of the automobiles in India have been growing strongly.While production increased from 5.3 million units in 2000-1 to 11 million units in 2006-07domestic sales during the same period have gone up from 5.2 million to 10.1 million units during the same period, as shown in the following table.
Table 4 : Domestic sales trend
Automobile Domestic Sales Trend ( Number of vehicles)
Category Passenger Cars Utility Vehicles MPVs Total Passenger Vehicles M&HCVs LCVs Total Commercial Vehicles Three Wheelers Scooters Motorcycles Mopeds Electrict Two Wheelers Total Two Wheelers
2001-02 509088 104253 61775 675116 89999 56672 146671 200276 908268
2002-03 541491 113620 52087 707198 115711 74971 190682 231529 825648
2003-04 696153 146388 59555 902096 161395 98719 260114 284078 886295
2004-05 820179 176360 65033
2005-06 882208 194502 66366
2006-07 1076408 220199 83091
1061572 1143076 1379698 198506 119924 318430 307862 922428 207472 143569 351041 359920 909051 275600 192282 467882 403909 940673
2887194 3647493 4170445 4964753 5810599 6553664 408263 338985 307509 322584 332741 355870 7341
4203725 4812126 5364249 6209765 7052391 7857548
Growth across the segments A positive trend in the domestic market is that the growth has not been driven by one or two segments, but is consistent across all key segments. In terms of number of vehicle sold : Two wheelers - constituting the majority of the industry volume, have experienced rise in sale from 42 lacs in 2000- 01 to 78.57 lacs during 2006-07 . Three wheelers – Rise in sales from 2 lacs in 2001-02 to 4 lacs in 2006-07. Passenger vehicles – Rise in sales from 6.75 lacs in 2001-02 to 13.79 lacs in 2006-07. Commercial vehicles – Sales have grown from1.47 lacs in 2001-02 to 4.68 lacs in 2006-07. Since nearly all macro-economic indicators GDP, infrastructure, population demographics, interest rates, etc. are showing a favourable trend, the domestic market for automobiles in India is expected to continue on its growth trajectory.
Table 5 Domestic Market Share for 2006-07 Vehicles CVs 5 Total Passenger Vehicles 14 Total Two Wheelers 77 Three Wheelers 4 % of share
Chart : Market share between vehicle segments
Market Share of Automobiles 2006-07
13% 4% 4%
79%
Two Wheelers Three Wheelers Commercial Vehicles Passenger Vehicles
Two wheelers have the highest share, followed by passenger vehicles, followed by three wheelers and commercial vehicles. The market share between different segments of vehicles has remained nearly the same changing marginally, for the past five to six years .
Table : Turnover of Automobile Manufacturers Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 (Rs. In Million) 422,933 492,024 499,136 595,184 661,769 835,851
Chart 2 Turnover of Automobile Industry 1999-00 to 2004-05
Since nearly all macro-economic indicators GDP, infrastructure, population demographics, interest rates, etc. are showing a favourable trend, the domestic market for automobiles in India is expected to continue on its growth trajectory. Commercial Vehicles The commercial vehicle production in India increased from 156,706 in 2001 to 467882 2006. This segment can be divided into three categories Heavy commercial vehicles (HCVs), Medium commercial vehicles (MDVs or MCVs) Light commercial vehicles (LCVs)
Table 7 : Market Share for Commercial Vehicle Segment Vehicle type M & HCVs ( % ) Year 2001-02 2004-05 2005-06 2006-07 62 62 41 62 38 38 59 38 LCVs ( % )
Medium and heavy commercial vehicles accounted for about 62 percent of the total domestic sales of commercial vehicles in 2001-02, 2004-05 & 2006-07 with change in proportion in the year 2005-06 in which the corresponding share was 41 cent. -Light commercial Vehicles formed 38 percent of the total domestic sales of commercial vehicles in 2001-02, 2004-05 & 2006-07. But it was 59 percent in 2005-06. -These segments have also been driving growth, having grown at a CAGR of nearly 24.7 per cent over the past five years ended on 2004-05.
The key trends facilitating growth in this sector are : development of ports and highways increase in construction activities agricultural output. With better roads and highway corridors linking major cities, the demand for larger, multi-axle trucks is increasing in India
Passenger vehicles This segment consists of passenger cars and utility vehicles.It has been growing at a CAGR of 11.3 per cent for the past four years ended 2004-05. Peculiarities of the segment A key trend in this segment is that with rising income levels and availability of better financing options, customers are increasingly aspiring for higher-end models. There has been a gradual shift from entry-level models to higher-end models in each segment. For example, in passenger cars, till recently, the Maruti 800 used to define the entry level car, and had a predominant market share.Over the last 3-4 years, higher-end models such as Hyundai, Santro, Maruti Wagon R, Alto and Tata Indica have overtaken the Maruti 800. Another development has been the blurring of the dividing line between utility vehicles and passenger cars, with models like Mahindra & Mahindra’s Scorpio attracting custommers from both segments. Upper end sports utility vehicles (SUVs) attract potential luxury car buyers by offering the same level of comfort in the interiors, coupled with onroad performance capability. Two wheelers The production of two wheelers in India increased from 4.24 million vehicles in 2001 to 7.6 million in 2005 followed by 8.45 million vehicles in 2005.The domestic sales have been increasing at a CAGR of 14.3 per cent for the 4 years preceeding 2004-05.The sales nearly doubled during 2001-02 to 2006-07 rising from 4.21 to 7.86. Motorcycles Motorcycles constituted 79.5 per cent of the domestic sales of two wheelers in India and have been growing at nearly 24 per cent CAGR.
Scooters In the scooter segment, overall domestic sales grew by1.3 per cent CAGR, driven primarily by ungeared scooters and scooters with automatic gears. The sales of mopeds have declined at a CAGR of 15.9 per cent for the four years preceding 2004-05. The motorcycle segment clearly drives the growth of the two wheeler segment in India. The two wheeler segment is being shaped by the following factors leading to an increase in demand for ungeared /autogeared scooters. Changing demographics and lifestyles. An increasing number of working women Greater affluence among college goers As with the case of passenger vehicles, there is a risingdemand for higher-end models that combine style and performance in this segment as well. In motorcycles, for example, models with higher engine capacities (125cc, 150cc or above) are proving very popular. Three wheelers The three wheeler segment in India is currently small in size, but growing rapidly. The production of three wheelers in India has increased from212748 vehicles in 2001 to 556124 vehicles in 2006. The domestic sales have increased at a CAGR of 14 per cent for the past four years from 200276 vehicles in 2001 to 403909 vehicles in 2006. These vehicles find use as passenger vehicles (auto-rickshaws) as well as small capacity commercial vehicles. (pick-up vehicles) Domestic Sales The figures for April-December 2007 over April-December 2006 indicate that domestic sales of automobiles decelerated with a negative growth rate of (-) 4.48 percent.
The cumulative growth of the Passenger Vehicles segment during April-December 2007 was 13.39 percent. Passenger Cars grew by 13.26 percent, Multi Purpose Vehicles by 21.57 percent and Utility Vehicles by 10.92 percent in April-December 2007 compared to the same period last year. In April-December 2007, the Commercial Vehicles segment grew by 3.56 percent over the same period in 2006. Light Commercial Vehicles recorded a growth of 14.32 percent; however, Medium & Heavy Commercial Vehicles witnessed a fall by 3.98 percent. Three Wheelers sales fell by 7.76 percent with sales of Goods Carriers decreasing by 18.39 percent. Passenger Carriers also fell with a negative growth rate of 0.08 percent during the period. Two Wheeler sales registered a negative growth of (-) 7.71 percent during AprilDecember 2007 over April-December 2006. Though Moped and Scooter segments grew by 19.47 percent and 16.06 percent respectively, Motorcycle and Electric Two Wheeler segments declined by 12.25 percent and 37.08 percent respectively.
Auto Components - Investments are increasing in line with the output According to Automotive Component Manufacturers Association of India (ACMA), the output of auto component industry in India has increased at a CAGR of around 25 per cent for the past three years from US$ 4470 million in 2002 to US$ 8700 million in 2005. With booming domestic sales and increasing demand from exports, the confidence of industry players is high. This is reflected in the increase in investments in capacity creation and expansion. Investments in this sector have increased from US$ 2300 million in 2002 to US$ 3950 million in 2005, a CAGR of 20 per cent. India's component industry now has the capability to manufacture the entire range of auto-components, such as engine parts, drive, transmission parts, suspension and braking
parts, electrical parts, and body and chassis parts, with engine parts making up nearly a third of all exports. Engine parts (31 per cent) Drive transmission and steering parts (19 per cent) Body and chassis (12 per cent) Suspension and braking parts (12 per cent) Equipment (10 per cent) Electrical parts (9 per cent) Others (7 per cent)
Exports of automobiles from India are booming While the domestic sales of automobiles have been increasing at a significant rate, exports have taken a quantum leap in recent years. The exports of automobiles from India have been growing at a CAGR of 39 per cent for the past four years. Exports growth has been spearheaded by the passenger vehicle segment, which has grown at a rate of 57.4 per cent.As a result, the share of passenger vehicles in overall vehicle exports has increased from 18 per cent in 1998-99 to 26 per cent in 2004-05.
Europe is the biggest importer of cars from the country while predominantly African nations import buses and trucks.The Association of South East Asian Nations (ASEAN) region is the prime destination for Indian two wheelers. Automobile Exports saw a growth rate at 17.37 percent during April-December 2007. Though exports of two wheelers segment grew by 25.44 percent and Commercial Vehicles exports grew by 15.93 percent in April-December 2007 over the same period last year, export growth in all other segments were marginal with Three Wheelers exports grew by only 1.40 percent and Passenger Vehicles exports at 2.77 per cent.
Chart 3 : Component wise exports
Auto Components exports – large potential Auto component exports from India grew from US$ 760 million in 2002-03 to an estimated US$ 1.4 billion in 2004-05. Key export destinations include o Americas (31.1 per cent) o Europe (30.3 per cent) o Asia (18.2 per cent) o Africa (10.7 per cent) and o The Middle East (7.6 per cent) Most of the key auto component manufacturers in India are very positive about the out look for exports, and expect about 15 per cent of their revenue to come from exports over the next 3-5 years. It has been estimated that exports of auto components from India could be around US$ 20-25 billion by 2015. India's component industry now has the capability to manufacture the entire range of auto-components, such as engine parts, drive, transmission parts, suspension and braking parts, electrical parts, and body and chassis parts, with engine parts making up nearly a third of all exports.
Engine parts (31 per cent) Drive transmission and steering parts (19 per cent) Body and chassis (12 per cent) Suspension and braking parts (12 per cent) Equipment (10 per cent) Electrical parts (9 per cent) Others (7 per cent)
SWOT ANALYSIS STRENGTHS – growth drivers of the India Very strong base of auto parts & components The foundation of a strong and unparallel auto component industry was laid down with Tariff commission recommendation in 1953 for a balanced and integrated development of the automotive industry through a strong base of the auto component industry the phased manufacturing programme introduced in 1980s for localization of input Size of the auto component industry is at present USD 9.4 billion, of which - USD 9.4 billion is the domestic OEM - USD 2.6 billion is the domestic aftermarket - USD 2.0 billion comprises of the export components low cost of labour Labour is a cheap factor of production in India. So India continues to attract the attention of the auto mobile producers. . Skilled manpower India has the potential to provide skilled manpower.The enigeering and managerial manpower require for the auto industry is adequately met by the IITs and IIMs. Rising per capita income India’s per capita income is rising and so the income available for consumption is increasing.With rise in the disposable incomes there will be an increase in demand.
Favourable demographic changes India has the highest proportion of population below 35 years. With 70 percent of the population falling in this range the demand gets a boost.It means that between 2003 and 2009 130 million people will be added to the working population.
Easy finance options There exists facility of vehicle financing through borrowing loan. Urbanisation Urbanisation driven growth of the two and three wheeler segments Increased urbanization and education accompanied by career awareness has resulted into growth of the two wheelers. Agriculture Due to the agricultural output of India and the agri exports there is a rise in the demand for tractors, which is one of the factor leading the Indian auto sector towards growth. WEAKNESSESS Technology It needs up gradation. Also there is an urgent need to keep up with the global standards. Pollution and environment OPPORTUNITIES Research & development In order to provide the latest available technology the government has under taken the NATRIP ( National automotive testing and R & D infrastructure development project). If it is carried out successfully it would provide an edge to the Indian auto sector over its global counterparts. The Government shall promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives. The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for sponsored research and in-house R&D expenditure. This will be improved further for research and development activities of vehicle and component manufacturers from the current level of 125%.
In addition, Vehicle manufacturers will also be considered for a rebate on the applicable excise duty for every 1% of the gross turnover of the company expended during the year on Research and Development carried either in-house under a distinct dedicated entity, faculty or division within the company assessed as competent and qualified for the purpose or in any other R&D institution in the country. This would include R & D leading to adoption of low emission technologies and energy saving devices. Government will encourage setting up of independent auto design firms by providing them tax breaks, concessional duty on plant/equipment imports and granting automatic approval. Allocations to automotive cess fund created for R&D of automotive industry shall be increased and the scope of activities covered under it enlarged. Additional employment The automotive sector should be able to provide an additional employment to 25 million people in the next nine years. Hub The AMP proposed a 25-point plan, including making India the manufacturing and export hub for small cars, multi-utility vehicles, two and three-wheelers, tractors and components. Increase in turnover The automobile sector is set to see an increase in turnover to $145 billion by 2016 from the present $35 billion
THREATS Infrastructure bottle necks India lags behind in terms of infrastructure facilities. Roads are in very bad condition.
Focus is required here to improve upon the infrastructure facilities, which if not done may cause serious impediment to auto sector and hence the related sector growth. Traffic on roads is growing at a rate of 7 to 10% per annum while the vehicle population growth for the past few years is of the order of 12% per annum. Poor road infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry. Solution A balanced and coordinated approach will be undertaken for proper maintenance, upgradation and development of roads by encouraging private sector participation besides public investment and incorporating latest technologies and management practices to take care of increase in vehicular traffic. For the convenience of traveling public the Government shall also promote multi-modal transportation and the implementation of mass rapid transport systems.
Environmental aspects The automotive and oil industry have to work together in a rhythmic manner to constantly fulfill environment imperatives. The Government will continue to promote the use of low emission fuel auto technology. Expert Committee on Auto Fuel Policy The Government after considering the recommendations of the Expert Committee on Auto Fuel Policy headed by Dr. R.A. Mashelkar, have approved a road map for implementation for the auto fuel quality consistent with the required levels of vehicular emissions norms and environmental quality. The Government will formulate a comprehensive auto fuel policy covering the other related aspects and ensure availability of appropriate auto fuel/fuel mixes at minimum social costs across the country.
Suitable institutional mechanism will be put in place for certification, monitoring and enforcement of different technologies/fuel mixes. Appropriate fiscal measures will be devised to achieve milestones in the roadmap for implementation of auto fuel policy. In the short run, the Government will encourage the use of short chain hydrocarbons along with other auto fuels of the quality necessary to meet the vehicular emissions norms. Non-conventional fuels There is prime need to support the development and introduction of vehicles propelled by energy sources other than hydrocarbons by promoting appropriate automotive technology. Hybrid vehicles and vehicles operating with batteries and fuel cells are alternatives to the conventional automobile, which in their early beginnings, lie intreasured. As an impetus for the development of such vehicles, an appropriate longterm fiscal structure shall be put in place to facilitate their acceptance vis-à-vis vehicles based on conventional fuels.
Vehicle fleet managenent Internationally, the practice is to levy higher road tax on older vehicles in order to discourage their use. In India, the road tax on vehicles varies in nature and quantum among the states. Lifetime road tax is also in vogue. The endeavour will be to move to the international model. In order to facilitate faster upgradation of environmental quality, the Govt. will consider having a terminal life policy for commercial vehicles alongwith incentives for replacement for such The new vehicles are cleaner and meeting stringent emission requirements, the benefits are not reflected in the ambient air quality due to the presence of a large number of old and ill maintained polluting vehicles.
The fleet renewal programme appears to be an effective measure to combat the problem of vehicular pollution The recommended action would be for the Government to notify a retirement scheme to be operated through a single window. It would help in removing older, potentially polluting and unsafe vehicles from the road. The replacement of these older vehicles would also have an additional favourable impact on the economy: o This project would generate additional demand for new vehicles o The country would benefit by way of reduction in expenditure account of fuel o Rise in saving by retiring old vehicles and replacing them with more new ones, which are more fuel efficient. o Reduction in pollution would lead to substantial health benefits Reduction in cost of medical treatment Reduction in premature deaths Reduction in man days lost on account of illness and so on.
The focus in the first phase would be in the seven principal cities namely Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad and Ahmedabad. This should be treated as a model and extended gradually to all other cities across India over a 3 to 5 year timeframe.
Building Bye Laws for Residential, Commercial and Other Uses With the growth of vehicles, smooth traffic movement has come under severe strain. The problem has been aggravated because of inadequate provision of parking facilities generally. Starting with metropolitan and important towns, the Government will pursue with State Governments and Local bodies amendments to bye laws for upward revision of the parking norms for new residential buildings, construction of common parking for existing residential areas besides parking upgradation in all commercial areas. Multistoried parking shall also be encouraged.
Continous innovation There is an urgent need for continous innovation to have a strong position in the industry.
PORTER’S DIAMOND FRAMEWORK
Availability of skilled manpower with engineering and design Capabilities India has a growing workforce that is English-speaking, highly skilled and trained in designing and machining skills required by the automotive and engineering industries. In a combined assessment of manpower availability and capabilities, India ranks much ahead of other competing economies as shown in the figure below. Large market with significant potential for growth in demand India offers a huge growth opportunity for the automobile sector –the domestic market is large and has the potential to grow further in the future due to positive demographic trends and the current low penetration levels.
Chart 4 India’s relative competitivenes
Outsourcing Many Indian and global players are leveraging this advantage by increasingly outsourcing activities like design and R&D to their Indian arms. The Society of Indian Automobile manufacturers (SIAM) estimates that automotive vehicle manufacturers are expected to invest US$ 5.7 billion in the Indian market from 2005 to 2010. Of this, about US$ 2.3 billion will be on research and development US$ 3.4 will be on capex
Some examples of investment in areas leveraging the engineering and design capabilities of India include: • MICO, the Indian operation of Bosch and a key player in fuel injection equipment, ignition systems and electricals, has invested in the MICO Application Centre (MAC) for R&D.It has emerged as a key global R&D competency centre catering to the entire Bosch Group. It is the first of its kind in India and the Bosch Group’s first outside Europe. • GM set up a technical centre at Bangalore that became fully operational in September 2003. The centre focuses on both R&D and engineering, and takes up high-value work to complement current research programmes, as well as new exploratory research projects. • Ford set up Ford Information Technology Services India (FITSI) in Chennai, which caters to the software requirements of Ford Motor Company in the region and around the world. FITSI develops solutions for Ford worldwide. For example, it developed web-based customer relationship services for o Ford India o Australia o South Africa. In addition, Ford has shifted the CAD/CAM development, e-mail processing an application development from worldwide operations to India’s FITSI. The Indian automobile industry is highly competitive with a large number of players in each industry segment. Vehicle segment Most of the global majors are present in the – passenger vehicle segment two wheeler segment
Component Segment In the components industry too, global players such as Visteon , Delphi and Bosch are well established, competing with domestic players. Table 8 Competitive industry, with global players SEGMENT Commercial Vehicles KEY PLAYERS Tata Motors, Ashok Leyland, Swaraj Mazda, Mahindra & Mahindra, Bajaj Tempo, Eicher Motors
Passenger vehicles
Tata Motors, Maruti Udyog, Honda Motors, Hyundai Motors, Toyota, Skoda, Mahindra & Mahindra, Daimler Chrysler, Hindustan Motors
Two Wheelers
Hero Honda, Honda Motors, Bajaj Auto, TVS Motors, Yamaha, Kinetic Engineering
Three Wheelers
Bajaj Auto, Piaggio India
Positive impact of competition The presence of global competition has led to an overall increase in capabilities of the Indian auto sector. Increase in competition has led to Pressure on margins, Players have become increasingly cost efficient
Quality levels have gone up An increasing focus on compliance to TPM, TQM and Six Sigma processes. This has led to an increased confidence among domestic players, who are now focusing on opportunities abroad. Key players in the components sector like Bharat Forge and Sundaram Fasteners have become key global suppliers in their categories. Large target consumer base and rising income levels India has nearly 23 per cent of the global population and is one of the most attractive consumer markets in the world today. Growing Consumer Class Income levels across population segments have been growing in India. According to National Council of Applied Economic Research (NCAER) data, The consuming class, with an annual income of US$ 980 or above, is growing…. And is expected to constitute over 80 per cent of the population by 2009-10. Young Population In addition, a large proportion of the Indian population is relatively young - in the age group of 20-59 years. This is expected to further boost the automotive domestic market as a younger population has a higher consumption index. The rise in income levels of the Indians and the emergence of the consuming class that has higher propensity to spend offers great opportunities for growth to companies across various sectors.
Changing lifestyles, driving demand for new segments Changing nature of the Indian Consumer Consumers in India are now more informed, sophisticated and demanding. Urban consumers have been especially exposed to western lifestyles through overseas travel. For example, more than 5 million Indians traveled overseas last year and this number is expected to increase by 15 per cent to 20 per cent per annum.
Nuclear families with working women An increase in the number of working women and the prevalence of nuclear doubleincome families, especially in urban areas, are other trends shaping lifestyles.
These changes are driving an increased need for personal transport, especially in segments like working women young executives teenagers
This has led to the growth in demand for motorcycles, ungeared and automatic scooters and compact cars.Across the automobile spectrum, consumer aspirations are driving demand for upper end models in all segments.
Presence of strong industry associations and supporting industries Industry Associations The Indian automotive industry is well served by the two industry associations Society of Indian Automobile Manufacturers (SIAM) that represents the OEMs Automotive Components Manufacturers’ Association (ACMA) that represents the components industry.
Both associations actively engage with industry, government and other stakeholders to promote the interests of the industry and improve competitiveness.
Supplier base Indian automobile manufacturers are well supported by the automotive component industry. Indian companies produce a range of automotive components like engine parts electrical parts equipments Ford is leveraging the large, high quality automotive supplier base of India and has made India a component-sourcing base. This has helped Ford reduce the cost of manufacturing and increase its exports. Ford India awarded the Q1 supplier status to 10 suppliers to help them export their products to Ford worldwide.
Government Regulations and Support The Auto Policies of Government of India are to facilitate sustainable development of Indian Automobile industry. “ Automotive Mission Plan 2006-2016 - A Mission to develop the Indian Automotive Industry” was an outcome of in-depth discussions with the all stakeholders – industry academia and authorities over a period of fifteen months. Inter ministerial groups formed focused on key areas. Major areas of focus were : Development of Infrastructure Induction of Technology Research and development Labour Reforms Employment related issues Change in fiscal and policy parameters Human resource development
Growth of domestic demand as well as exports Environmental and safety issues
The Indian automotive industry will have a distinct edge amongst the newly emerging automotive destinations of the world.
This will be possible is because of – Time bound implantation of the auto policy 2006- 20016 Establishment of world class testing, homologation certification facilities nine state of art R & D centres under NATRIP ( National automotive testing and R & D infrastructure development project)
The Government of India (GoI) has identified the automotive sector as a key focus area for improving India’s global competitiveness and achieving high economic growth. Vision “To establish a globally competitive industry in India And to double its contribution to the economy by 2010.”. “To emerge as the destination of choice in the world for design and production of automobiles and auto components with the output reaching US$145 billion, accounting for more than10 percent of the GDP and providing additional employment to 25 million people by 2016.”
It intends to promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives.
Some of the policy initiatives include: • Automatic approval for foreign equity investment upto 100 per cent of manufacture of automobiles and component is permitted. • Customs Duty Inputs and raw material The customs duty on inputs and raw materials has been reduced from 20 per cent to 15 per cent. Auto components The peak rate of customs duty on parts and components of battery-operated vehicles have been reduced from 20 per cent to 10 per cent. Second hand cars Apart from this, custom duty has been reduced from 105 per cent to 100 per cent on second hand cars and motorcycles. These new regulations would strengthen India’s commitment to globalisation. • National Automotive Fuel Policy has been announced, which envisages a phased programme for introducing Euro emission and fuel regulations by 2010.
• Tractors of engine capacity more than 1800 cc for semi-trailers will now attract excise duty at the rate of 16 per cent.
• Excise duty is being reduced on tyres, tubes and flaps from 24 per cent to 16 per cent. Customs duty on lead is 5 per cent. • A package of fiscal incentives including benefits of double taxation treaty is now available.
These government policies reflect the priority government accords to the automobile sector. A liberalised overall policy regime, with specific incentives, provides a very conducive environment for investments and exports in the sector.
Economic Affairs Excise Duty Excise Duty is essentially a manufacturing tax imposed on all vehicles manufactured in India. The same rate is applicable to imported vehicles in the form of Counter Vailing Duty (CVD). At present the excise duty on automobile falls between 16 – 24 percent depending on the vehicle type, its build and component and final use or purpose. The excise duty on vehicles used by physically disabled people is nil. Only Petrol driven Goods Transport Vehicles falling under tariff heading 8704 to attract duty of 24 %.
Duty on CNG/LPG Vehicles falling under tariff heading 8704 to attract only l6% excise duty.
Custom Duty Custom Duty is essentially an import duty applicable on all imports.
Custom Duty for items falling under 8703 & 8711, • If imported as Completely Knocked Down (CKD) unit 10% • If imported in any other form/ new 60%
VAT has recently replaced Local Sales Tax in India. However, VAT has not yet been adopted by all states in India.
.SIAM (Society of Indian Automobile) suggestions for VAT Implementation 1. VAT in all States VAT system of taxation required to be implemented simultaneously throughout the country in all States and Union Territories at the same time. This will avoid serious market distortions and enhances industry's competitiveness. 2. Uniform VAT Law and procedure India has often been described as a country with large market. But unfortunately this large market has been highly fragmented by inter-state barriers. It is further complicated by State specific law on sale of goods. The wide divergence in the structure and practice has hampered free flow of goods and services within the country and effected competitiveness of Indian Industry. Homogeneity is the essence of VAT and all States should come together to accept a common law under VAT. All forms, returns & declarations should be common to avoid artificial barriers and complexities. 3. State VAT Rate and Classification of goods Uniform rate structure across the country helps in avoiding diversion of trade from one State to another checks unhealthy competition reduces tax evasion enables the automobile industry to plan and commit long term investments
Basic rationale needs to be developed for generation of revenue from industrial products. This should be long term and the share of taxation in the total value of the ultimate customer, needs to be defined. SIAM recommends such a policy in taxing goods and services under VAT.
Total taxes from both Centre and State as proposed by SIAM not to exceed 25%. Considering Cenvat at 16%, Designated rate should not exceed 9%. Uniform classification of goods The classification of goods should be aligned to central taxes to reduce litigation. Uniform classification across all States and central taxes would create favourable environment for growth of industry. No separate classification of Capital Goods 4. Multiple levies and Industrial input One of the stated objectives of VAT is to reduce multiple levies. Number of rates under VAT should be 0%, 4% & RNR in addition to 1% on precious metal and 20% on petroleum products. All other levies like Octroi, Entry Tax should be abolished. Inputs used in the manufacturing should be taxed at 4% against issue of declaration. There should not be any specific list of industrial input, as it will deprive the benefit to the industry using input other than the one mentioned in the list. Reduced rate on industrial input will avoid refund problem and avoid unnecessary interaction with the Department. Further when interstate transactions are zero rated, manufacturer selling predominantly in interstate ends up having huge input tax credit without set-off. Automobile manufacturers having one manufacturing facility in the country sells more than 80% of the production outside the Sate and forced to seek refund from the State Government for excess input tax credit. SIAM suggests VAT rate of 4% on all industrial input to mitigate the refund issue. 5. Set-off mechanism Set-off of tax paid should be allowed for all inputs including raw material, components, consumables, fuel and capital goods. Tax paid on services should be allowed to be setoff. Tax paid on capital goods should be allowed as set-off in full in the same year to avoid confu -sion and litigation later.
6. Interstate transactions All interstate transactions should be at zero rate. Further automobile manufacturers 'Stock Transfer' goods by setting up huge facilities to strengthen distribution net work in order to reach the product to the customer at the earliest and at least cost. This mechanism should not be affected even under VAT. 7. Sales Tax Incentives Automobile manufacturers have made huge investments, which are in phases in unviable locations. These locational disadvantages are partially offset by fiscal incentives. Any detrimental variations or withdrawal will affect the viability of such investments. This may adversely impact the country's image as an attractive investment destination. It is heartening to note that all States have agreed in principle to honour all existing incentives under VAT SIAM suggests the following: Table 9 Incentive Input Tax Exemption Output Tax Exemption Output Tax Deferral Input Tax Exemption & Output Tax Exemption Input Tax Exemption & Output Tax Deferral SIAM Suggestion . Refund Input Tax separately - adopt Maharashtra model · Continue exemption, Option to Defer output tax · Continue Deferment, refund input tax separately. · Refund Input Tax separately, Option to Defer output tax · Refund Input Tax separately, to Defer output Tax
8. Refunds Due to various reasons there is no alternative but to seek refund from the Government in case of excess credit. Given the state of finances, refunds will be difficult and uncertain while locking up working capital for industry.
Refunds should be honoured within 15 days from the date of filing returns and credited to the assessee's account. Alternatively, VAT Entitlement Certificate on the lines of freely tradable DEPB may be considered. 9. Industry Representation Empowered Committee may consider inducting industry representation in the committee for transparency and smooth introduction of VAT.
The outlook for India’s automotive sector appears bright The outlook for India’s automotive sector is highly promising. Growth In view of current growth trends and prospect of continuous economic growth of over 5 per cent, all segments of the auto industry are likely to see continued growth. Infrastructure Large infrastructure development projects underway in India combined with favorable government policies will also drive automotive growth in the next few years. Finance Easy availability of finance and moderate cost of financing facilitated by double income families will drive sales in the next few years. Outsourcing hub India is also emerging as an outsourcing hub for global majors. Companies like GM, Ford, Toyota and Hyundai are implementing their expansion plans in the current year. Ford and Toyota continue to leverage India as source of components.Hyundai and Suzuki have identified India as a global source for specific small car models
Overseas ventures At the same time, Indian players are likely to increasingly venture overseas, both for organic growth as well as acquisitions. The automotive sector in India is poised to become significant, both in the domestic market as well as globally.
Highlights of Union Budget 2007- 08 A. Main Highlights
Plan allocation increased by 18% .However, Capital expenditure increase is only 9% against Revenue expenditure increase of 20%. Focus on Roads including NHDP allocation which is 7.2%; PPP model to be encouraged further. Increased outlay on JNURM from Rs 4595 crores to Rs 4987 cr. Use of Foreign Exchange reserve for infrastructure finance. Emphasis on developing skilled and trained manpower; Increased funds and Interest free loan for upgradation of ITIs. Setting up of Green House Gas Emission Committee. B. Excise Duty Structure (in %) Bio-Diesel is exempted from excise duty. C. Customs Duty Structure Peak Rate of Customs Duty reduced to 10% from 12.5%. Customs Duty on various Components & Raw Materials reduced. D. Central Sales Tax CST reduced to 3% from 4%. GST to be introduced with effect from April 1, 2010.
G. Service Tax No change in the Service Tax rate. Service tax net widened; Service tax imposed on design services.Only Petrol driven Goods Transport Vehicles falling under tariff heading 8704 to attract duty of 24 %. Duty on CNG/LPG Vehicles falling under tariff heading 8704 to attract only l6% excise duty.
The automotive sector is growing strongly in both domestic and exports markets. Indian automobile industry has been performing well both in the domestic and the international markets. Automobiles - Domestic Performance Table 10 Capacity installed Installed Capacity in Indian automobile Industry 2003 -04 2003-2004 Installed Capacity (In Million) a) Four Wheelers b) Two &Three Wheelers c) Engines 2004-2005 Installed Capacity (In Million) 1.51 a) Four Wheelers 7.83 b) Two &Three Wheelers 0.18 c) Engines 1.72 9.13 0.18
The world's top car makers turn to India for the nuts and bolts of their vehicles. Riding this success, and capitalising on the spiralling demand of domestic auto companies, the Indian automobile components industry has emerged as one of India's fastest growing manufacturing sectors, and a globally competitive one. According to the Auto Component Manufacturers Association (ACMA), the apex body of component makers in India, global sourcing of components from the country will
double from US$ 2.95 billion to US$ 5.9 billion in 2008-09, and is slated to hit US$ 20 billion in seven years. Of the total global auto components trade of US$ 185 billion, India's share is 0.4 per cent. The auto component sector generated sales of about US$ 15 billion in fiscal year 200607, including US$ 2.8 billion worth of exports, says ACMA. Industry sales will swell to US$ 40 billion by 2016 with US$ 20 billion coming from exports, ACMA says. The global auto component industry is expected to touch US$ 1.9 trillion by 2015, of which around 40 per cent (US$ 700 billion) is potentially expected to be sourced from low cost countries like India. The ACMA-McKinsey Vision 2015 document estimates the potential for the Indian auto component industry to be US$ 40-45 billion by 2015. Of this, 50 per cent is expected to come from exports. India is estimated to have the potential to become one of the top five auto component economies by 2025. The industry has been experiencing a high growth rate of 20 per cent over the period 2000-05 and is expected to grow at a rate of 17 per cent over the period 2006-14. The growth rate of exports has been 25 per cent during 2000-05, the growth rate is expected to grow by 34 per cent during 2006-14. A large number of cars in North America, Europe and in other auto marts of the world now carry Indian brands under their bonnets. Of the US$ 2.21 billion worth of component exports by the Indian auto component industry, around 70 per cent are bought by global majors such as General Motors, Ford Motor and DaimlerChrysler, among others. India's component industry now has the capability to manufacture the entire range of auto-components, such as engine parts, drive, transmission parts, suspension and braking parts, electrical parts, and body and chassis parts, with engine parts making up nearly a third of all exports.
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Engine parts (31 per cent) Drive transmission and steering parts (19 per cent) Body and chassis (12 per cent) Suspension and braking parts (12 per cent) Equipment (10 per cent) Electrical parts (9 per cent) Others (7 per cent)
The India Advantage Steered here by India's sophisticated engineering skills, established production lines, a thriving domestic automobile industry and competitive costs, global auto majors are rapidly ramping up the value of components they source from India. The share of exports in total production has risen from 10 per cent in 1997 to 18 per cent in 2006. The industry is poised to jump from exports of US$ 1.8 billion in 2004-05 to US$ 2.89 billion in 200607 and US$ 5.9 billion in 2008-09. According to ACMA, more than a third (36 per cent) of Indian auto component exports head for Europe, with North America featuring a close second at 26 per cent. The composition of exports in terms of the proportion of original equipment manufacturer (OEM) and aftermarket has undergone a sweeping change since the past decade. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2006. In 2006, components worth US$ 2 billion were exported by Indian companies, 75 per cent of which were bought directly by car companies. While exports have been booming, there has been a sharp rise in imports of auto components as well, especially in the last three years. From an import of US$ 250 million in FY03, they have gone up to US$ 750 million in FY06. This is a healthy trend, indicative of rising domestic demand. Over 20 OEMs have set up their International Purchase Offices (IPOs) in India to the components. This number is expected to double by the year 2010. The OEMs in India
include firms like General Motors, Ford Motor Company, Cummins International, Bosch, Volkswagen, BMW, MAN (trucks) and JCB (earthmoving equipment) amongst others. India enjoys a cost advantage with regard to castings and forgings. The manufacturing costs in India are 25 to 30 percent lower than its western counterparts. India's competitive advantage does not come from costs alone, but from its full service supply capability. Besides, the quality consciousness of the industry matches global standards now. This is corroborated by the fact that nine Indian companies in the automotive sector have received the coveted Deming Prize, which is the largest number outside Japan. Investments Since 2000, the auto component industry has recorded an investment level of US$ 0.44 billion and has attracted US$ 530 million in terms of foreign direct investment (FDI). The Investment Commission has set a target of attracting foreign investment worth US$ 5 billion for the next five years to increase India's share in the global auto components market from the present 0.4 per cent to 3-4 per cent.
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Chrysler is setting up a local sourcing unit in Chennai and is expected to start sourcing for its global plant by next year. Palfinger AG, the Austrian hydraulic lifting, loading and handling systems manufacturer, has joined hands with Western Auto LLC, Dubai, the vehicle dealership arm of ETA Star group, have invested US$ 1.7 million to set base in India.
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IFCI Venture Capital Funds Ltd is launching a private equity fund in association with German consultancy UBF-B worth US$ 144.67 million focussed entirely on domestic automotive components industry.
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The world’s third largest auto components maker, Magna International Inc., plans to bring two more group companies to India in the next 12 months and is considering the Gurgaon, Chennai and Pune regions for these manufacturing facilities.
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Auto parts maker Robert Bosch of Germany will invest US$ 201.4 million in its Indian subsidiaries over the next two years. Ashok Leyland and Nissan Motor have invested US$ 500 million in three joint ventures to manufacture light commercial vehicles (LCVs), LCV engines and power train components.
Global OEMs sourcing parts from India include General Motors, Ford, Fiat, DaimlerChrysler, Eaton Corporation, Renault, Volvo. General Motors has decided to increase sourcing and intends to ship parts worth US$ 1 billion to its global production units by 2010. Ford Motor has also planned to source components worth US$ 500 million from India for its global operations. Not only global investors, Indian component companies are also pumping in huge sums into expanding operations:
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Bharat Forge invested US$ 135 million in its Pune plant for increasing domestic capacity to 240,000 tons.
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Amtek Auto is expanding capacity of its castings unit to 70,000 tonnes per annum (tpa) from 30,000 tpa.
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Sona Koyo plans to have capacity of three million pieces of manual steering gears, 500,000 units of hydraulic power steering and 250,000 units of electronic power steering (EPS), apart from doubling the capacity of steering columns from one million parts.
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Rico Auto is investing US$ 23 million to expand capacity.
Government initiatives The Government of India allows automatic approval for foreign equity investment up to 100 per cent for the manufacture of auto components. Manufacturing and imports in this sector is free from licensing and approvals. There is no local content regulation in the auto industry. The engineering export promotion council under the aegis of Ministry of Commerce and Industry, Government of India, over the years has been engaged in
promoting exports of engineering goods including auto parts. Among other initiatives that have been effected in 2006-07 are:
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Setting up of the National Automotive Testing and R&D Infrastructure Project (NATRIP) at a total cost of US$ 388.5 million for enabling the industry to usher in global standards of vehicular safety, emission and performance standards.
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Finalization of the Automotive Mission Plan (AMP) 2006-2016 for making India a preferred destination for design and manufacture of automobile and automotive components.
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The reduction in customs duty -- maximum level of 7.5 per cent -- on key metallic raw materials and inputs for the auto-component industry.
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Reduced excise duty on small cars to 16 per cent, a step which would propel India as a global manufacturing hub for small cars and directly enable the autocomponent supplier industry to attain volumes.
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Reduction of peak rates of duty from 15 to 12.5 per cent. The government has notified setting up an automobile testing and homologation centre, International Centre for Automotive Technology (iCAT), at an investment of US$ 15.23 million which would act as an accredited agency to approve homologation standards for automobiles.
The road ahead Exciting times lie ahead for the Indian automotive component industry. The Indian auto component industry is likely to almost double to US$ 18.7 billion by 2009 and reach about US$ 40 billion by 2014. Besides the burgeoning demand from global auto majors, there is also the domestic car industry, which is growing at a spanking rate of over 20 per cent, driven by a rising consumer base and affordable loans. The Indian automotive industry has witnessed an unprecedented boom in recent years, owing to the improvement in living standards of the middle class, and a significant increase in their disposable incomes.
The industry is expected to touch the 10 million mark, to which the Commercial Vehicle Segment will be a major contributor. Industry experts peg the Indian Automobile sales growth at a compounded annual growth rate (CAGR) of 9.5 per cent - 13008 million vehicles - by 2010. Production Growth in consumer-spending habits has reshaped the industry which has spurred an enormous cost advantage in manufacturing, research and development (R&D), skilled labor, software, and design, encouraging leading automakers to perceive India as a global player in this sector. Marked by consistent growth at a frantic pace, the automobile industry recorded production of a wide variety of vehicles - including over 2.06 million four-wheelers (passenger cars, light, medium and heavy commercial vehicles, multiutility vehicles such as jeeps), and over 9 million two-and-three wheelers (scooters, motor-cycles, mopeds, and three wheelers) - in 2006-07. Sales Domestic passenger car sales in India increased by 16.42 per cent in November to 1,03,031 units from 88,501 units in the same month last year. According to the figures released by the Society of Indian Automobile Manufacturers (SIAM), commercial vehicle sales during the month rose by 0.38 per cent at 40,466 units, against 40,313 units for the corresponding period last year. The Society of Indian Automobile Manufacturers' Association (SIAM) estimates sales figures of 7 million motorcycles, 1.55 million cars (including MPVs, SUVs and MUVs) and 8.3 million two-wheelers, for the 2007-08 fiscal. Consequently, India should be able to contribute about 3 per cent to the total automotive industry output by end-2007.
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Maruti Udyog Ltd, India's biggest car maker, recorded a growth of about 20.7 per cent during April-August 2007 - selling 2,93,536 vehicles as against 2,43,211 in the corresponding period of the previous year. For the first time, Maruti Suzuki sold more cars in India than its parent in Japan during the first half of the fiscal year.
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Mahindra & Mahindra Limited (M&M) cumulative sales (including exports) during the April-September period grew by 35.8 per cent - 1,06,094 units compared to 78,144 units in the corresponding period last fiscal.
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Honda Siel Cars India Ltd. (HSCI), one of the leading manufacturers of premium cars in India, recorded a growth of 16.1 per cent in cumulative sales during January-August 2007 over the previous year selling 41,638 units against 35,853 units.
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SkodaAuto has already doubled sales targets to 25,000 units this year, from 12,000 units in 2007, paving the way for local production.
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Hyundai Motors India Limited (HMIL) exported 67,625 units during AprilSeptember and gained 14 per cent - constituting 68 per cent of all car exports from India in the half-year period.
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DaimlerChrysler sold 1,681 units during January-August 2007 - growth of over 22 per cent from a year ago.
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General Motors India (GM), the wholly owned subsidiary of General Motors Corporation, US, reported 114 per cent increase in domestic sales in August - at 5,817 units against 2,720 units in the same month last year.
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Hero Honda crossed the 2 million unit sales mark during January-August 2007 Motorbike exports from India grew to 3, 21,321 units in the April-August period this fiscal from 2,37,103 units in the same period last year.
Recent models which have witnessed huge sales are:
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Maruti's sedan SX4 and Zen Estilo. Mahindra Renault's Logan General Motors' Chevrolet Spark and Aveo UV-A Hyundai's Verna Fiat Palio's new 1.1 litre version Tata Motors Magic and Winger
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Volkswagen's Passat
FDI in the automobile sector The Indian automobile success story has paved the way for foreign investments, making India an attractive destination for global players like Japanese, Korean, European, and American OEMs which made a foray in the Indian market and added over 1 million fourwheelers during 2005-06. International carmakers are now shifting focus to India, from China, to establish their manufacturing plants and units:
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Suzuki Motor Corp will make India a production hub and build a new 'world car' in the country, and is beefing up its vehicle line-up and dealer network in a bid to retain its market-share of at least 50 per cent. With a capacity to make 1 million units by 2010-11, it is investing US$ 1.75 billion in R&D.
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GM India reported a whopping 110 per cent jump in its domestic sales during November at 5,356 units against 2,554 units in the same month last year.
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HMIL is also looking at exporting 50 per cent of its car production in India. By 2008, the company plans to produce 6,00,000 units at its Chennai plant, half of which will be exported. India will account for 30 per cent of its international production by next year.
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Harley Davidson may finally hit the Indian roads. In an effort to ease import of all bikes with over 800cc engine capacity, as India has now allowed import of all such bikes which have been tested and approved (read homologated) by any certified agency from the European Union.
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Yamaha Motor India has already launched its two super bikes - 1,000 cc YZF R1 and 1,680 cc MT01 - in India.
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Audi AG has started production on its midsize A6 luxury sedan, with the aim of producing more than 2,000 cars a year by 2015 at the plant in Aurangabad, Maharashtra. It will invest US$ 29.37 million by 2015 in India, and also begin assembly of its A4 model aiming for a bigger share of the fast-growing market.
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Volkswagen may make India a base to make cars exclusively for the world market. It is setting up a US$ 601.6 million production plant in Pune to
manufacture B/B Plus segment car specifically designed for India, and expects to sell about 4,00,000 cars in 10 years in India.
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SkodaAuto plans to make India its regional manufacturing hub. It will start producing cars in India by 2010 with a manufacturing target of 50,000 units.
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Piaggio will step up production in India and launch scooters in a market that is set to play a greater role in the Italian firm's global operations. It has also entered a new agreement with India's Greaves Cotton for diesel engines for three-wheelers.
The Nano revolution Tata Motors has introduced the global auto industry to a whole new consumer segment, with the 'Nano' also shedding light on how to leverage emerging markets as innovation hubs. The Nano promises to be a potentially revolutionary innovation, delivering a car to huge segments of the market hitherto unable to afford one. This Tata small car is a landmark event in India as well as the world's automobile history. The Tata Motors plant in Singur in West Bengal has a maximum capacity of 2,50,00; at full capacity the Nano has the potential to become the largest selling model in India. The first truly original automobile product from India, Nano is powered by a 623 cc, four-speed manual transmission engine. Despite the small size it is a modern car capable of meeting BharatIII and Euro-4 emission norms and safety standards. Mergers and Acquisition (M&A), Joint Venture (JV) An upbeat Indian economy, corporate cash and friendly government policies have contributed to the new M&A trend. Indian companies are now aggressively looking at North American, European markets and Asia to spread their wings and become global players in this sector. Indian automotive industry now has the dynamics of an open market. Many JVs have been set up in India with foreign collaboration, both technical and financial with leading global manufacturers. This has led to the recent spurt in the demand for new automobile models in India where over 20 models have been launched in only passenger vehicle segment over the past 12 months.
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Tata Motors is a front runner in acquiring US-based Ford Motors of Jaguar and Land Rover.
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DaimlerChrysler AG of Germany has taken a call option to buy 26 per cent in Jalandhar-based bus body builder Sutlej Motors.
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German auto major Daimler will hold 60 per cent stake in its commercial vehicle joint venture in India with the Hero group holding the remaining 40 per cent, with a total investment of about US$ 870.5 million.
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Mahindra and Mahindra (M&M) will set up a utility assembly plant in Manuas, North Brazil, with local partner Bramont. In Egypt, the company will assemble Scorpios under the CKD operation with local partner Bavarian Motors.
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Tata Motors, have ventured into Saudi Arabia's passenger car market with the launch of its three car models-- Tata Indica, Tata Indigo and Tata Marina.
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TVS Motor Company has set up a two-wheeler manufacturing plant in Indonesia at Surya Cipta Estate in Karawang.
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Maruti Udyog Ltd has been able to capture about 60 per cent of the small car market in Indonesia with an export order worth 12,000 units, 1,000 units more than what the company had said in June.
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Tata Motors acquired a Nissan facility in Pretoria, S. Africa which would allow it to roll out Tata vehicle for both South African and European market.
Testing and Certification Indian expertise in the automotive sector is coming handy for global car companies like Japanese manufacturers Nissan, Toyota and Honda and the German luxury car makers like BMW and Volkswagen to test their vehicle performance and get international certification. These car makers are negotiating with the National Automotive Testing and R&D Infrastructure Project (NATRIP) to take on the rigorous robustness and performance tests of their future vehicles intended for both overseas as well as the Indian market.
Funded by the Union Government, NATRIP's centre at Manesar, in Haryana, began operations recently to carry out homologation tests. It also has centres at Oragadam near Chennai, and Vehicle Research & Development Establishment near Pune. Going forward, the organisation plans to open three more centres in Silchar, Rai Bareily and Indore. Global car makers such as BMW, Nissan, Toyota, and Honda are in talks with NATRIP, to avail themselves of its facilities for testing the durability and performance of their vehicles for the global market. Auto-makers like Maruti Suzuki India and Hyundai Motors India, which together produce over 70 per cent of the cars manufactured in India, have also shown keen interest to get their vehicles tested and homologated. In the driver's seat India has made a mark in the global automobile industry; the salient aspects below make for India featuring on every leading automobile player's roadmap.
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India is the second largest two-wheeler market in the world Fourth largest commercial vehicle market in the world 11th largest passenger car market in the world Fifth-largest bus and truck market in the world (by volume) Envisaged to be the 7th largest automobile market by 2016, and world's 3rd largest by 2030 (behind only China and the US)
CHAPTER THREE
COMPANY ANALYSIS
The companies studied include ‘Tata Motors’ and ‘Ashok Leyland’Tata motors is a player in the passenger as well as the commercial vehicle segment. Ashok Leyland is in the medium and heavy commercial vehicle segment.
He technique used to value the company stock is discounted cash flows (DCF). A stock can be valued using DCF by two ways. They are:
o FCFF- Free cash Flow to firm o FCFE- Free cash Flow to Equity
This study is conducted using the FCFE approach.. The WACC is used to discount the cash flows. The cost of equity capital is determined by CAPM (Capital asset Pricing Model) The cost of debt is taken as the prevailing rates in the market.
Having projected the company's free cash flow for the next five years, we want to figure out what these cash flows are worth today. That means coming up with an appropriate discount rate which we can use to calculate the net present value (NPV) of the cash flows.
The WACC is essentially a blend of the cost of equity and the after-tax cost of debt.so, we need to look at how cost of equity and cost of debt are calculated.
Cost of Equity Unlike debt, which the company must pay at a set rate of interest, equity does not have a concrete price that the company must pay. But that doesn't mean that there is no cost of equity. Equity shareholders expect to obtain a certain return on their equity investment in a company. From the company's perspective, the equity holders' required rate of return is a cost, because if the company does not deliver this expected return, shareholders will
simply sell their shares, causing the price to drop.
Therefore, the cost of equity is basically what it costs the company to maintain a share price that is satisfactory (at least in theory) to investors. The most commonly accepted method for calculating cost of equity comes from the Nobel Prize-winning capital asset pricing model (CAPM), where:
Cost of Equity (Re) = Rf + Beta (Rm-Rf)
The elements of the formula are:
Rf - Risk-Free Rate This is the amount obtained from investing in securities considered free from credit risk, such as government bonds from developed countries. The interest rate of Treasury bills or the long-term bond rate is frequently used as a proxy for the risk-free rate.
ß – Bet This measures how much a company's share price moves against the market as a whole. A beta of one, for instance, indicates that the company moves in line with the market. If the beta is in excess of one, the share is exaggerating the market's movements; less than one means the share is more stable. Occasionally, a company may have a negative beta (e.g. a gold mining company), which means the share price moves in the opposite direction to the broader market.
(Rm – Rf) Equity Market Risk Premium The equity market risk premium (EMRP) represents the returns investors expect, over and above the risk-free rate, to compensate them for taking extra risk by investing in the stock market. In other words, it is the difference between the risk-free rate and the market rate. It is a highly contentious figure. Many commentators argue that it has gone up due to the notion that holding shares has become riskier.
Once the cost of equity is calculated, adjustments can be made to take account of risk factors specific to the company, which may increase or decrease the risk profile of the company. Such factors include the size of the company, pending lawsuits, concentration of customer base and dependence on key employees. Adjustments are entirely a matter of investor judgment and they vary from company to company.
Cost of Debt Compared to cost of equity, cost of debt is fairly straightforward to calculate. The rate applied to determine the cost of debt (Rd) should be the current market rate the company is paying on its debt. If the company is not paying market rates, an appropriate market rate payable by the company should be estimated.
As companies benefit from the tax deductions available on interest paid, the net cost of the debt is actually the interest paid less the tax savings resulting from the tax-deductible interest payment. Therefore, the after-tax cost of debt is
Rd (1 - corporate tax rate)
Capital Structure
The WACC is the weighted average of the cost of equity and the cost of debt based on the proportion of debt and equity in the company's capital structure. The proportion of debt is represented by D/V, a ratio comparing the company's debt to the company's total value (equity + debt). The proportion of equity is represented by E/V, a ratio comparing the company's equity to the company's total value (equity + debt). The WACC is represented by the following formula:
WACC = Re x E/V + Rd x (1 - corporate tax rate) x D/V.
A company's WACC is a function of the mix between debt and equity and the cost of that debt and equity. On the one hand, in the past few years, falling interest rates have reduced the WACC of companies. On the other hand, corporate disasters like those at Enron and WorldCom have increased the perceived risk of equity investments.
TATA MOTORS With the launch of nana as the commom man’s car tata is all set to steal the show.It has made it possible to own a car in one lac. The company is going for heavy investment to keep up with the future demands. Table 11 Lates results and shareholding pattern Latest Results (Rs Cr) 200712 Period-Ended Sales 7251.83 Other Income 180.5 PBIDT 985.56 PBDT 832.61 PBIT 818.05 PBT 665.1 RPAT 499.05 EPAT 48.77 APAT 450.28 CP 666.56 Shareholding Pattern (as on 31-Dec-2007) Foreign Institutions Govt Holding Non Promoter Corp. Hold. Promoters Public & Others Totals
200612 6895.75 100.78 954.55 852.24 811.05 708.74 513.17 0 513.17 656.67
Var. (%) 5.16 79.1 3.25 -2.3 0.86 -6.16 -2.75 NA -12.26 1.51 (%) 37.79 17.01 0.11 1.07 33.42 10.61 100
Shares 145692152 65587919 407181 4136901 128817405 40862396 385503954
Based on the equity research of tata security the suggestion for the investor is to sell the security. Intrinsic value of the security is Rs206.67 and the market price is Rs 635.75, on 3rd of april 2008.as the share is overpriced it is advisable to sell it as ther exists a wide gap between the intrinsic value and the market price.
Valuation of the stock
Market return -is 28.62 % Beta of the security is 1.2 WACC is 6% Cost of equity (Ke) = 34% Cost of debt (kd) is 6.37% The cost of equity is calculated with CAPM formula. Intrinsic value of the security is calculated by using the ‘Free cash flow approach to Firm’.In this approach of DCF,
Intrinsic values of a share is equal to the present values of all the future cash flows during the forecast period plus the present value of terminal value ( that is the PV of cashflows after the explicit forecast period. Sell decision The free cash flows amount to Rs 811720.1 crores. The intrinsic value comes to Rs 206.67per share, whereas the market price is Rs 206.67 Per share.So, the share is overpriced and the gap is quite large. So sell decision makes sense.
The future prospects are quite bright and auto sector which is supported heavily by the govt. and so company is looking for further growth and expansion.
ASHOK LEYLAND LTD
Ashok Leyland is one among the major player in the domestic commercial vehicle segment.the company is set to gear up for the future growth. It is planning increase in investment son a large scale.
BSE Group: A
BSE Code: 500477
Industry: Automobiles -LCVs / HCVs Bloomberg Code: AL@IN Reuters Code: ASOK.BO NSE Code: ASHOKLEY BSE Group: A Group: Hinduja
Table 12 Latest results Latest Results (Rs Cr) Period-Ended 200712 200612 Var. (%) Sales Other Income PBIDT PBDT PBIT PBT RPAT EPAT APAT CP 1800.08 1777.59 1.27 43.7 207.9 192.65 165.07 149.82 120.22 -1.28 121.5 161.05 6.35 188.34 185.78 153.86 151.3 105.26 -2.06 107.32 138.49 588.19 10.39 3.7 7.29 -0.98 14.21 -37.86 13.21 16.29
Table 13 Share holding Pattern for Ashok leyland
Shareholding Pattern (as on 31-Dec-2007) Foreign Institutions Govt Holding Non Promoter Corp. Hold. Promoters Public & Others Totals Share Price Graph Shares 393622257 211548508 1109360 45808634 513618712 164630846 (%) 29.59 15.9 0.08 3.44 38.61 12.38
1330338317 100
Valuation of the stock Market return -is 28.56 % Beta of the security is 1.105 WACC is 10 % Cost of equity (Ke) = 30% Cost of debt (kd) is 8% The cost of equity is calculated with CAPM formula. Intrinsic value of the security is calculated by using the ‘Free cash flow approach to Firm’ .In this approach of DCF,the Wacc during the the forecast period plus the present value of terminal value that is the PV of cashflows after the explicit forecast period. The free cash flows amount to Rs 811720.1 crores.
Hold decision The intrinsic value comes to Rs 28.32 per share, whereas the market price is Rs 34.65 Per share.So, the share is overpriced but since there is potential looking at the future of the auto sector and since the gap is a smaller one(Rs 6.28) the decision is to hold.
Key Assumptions and bases for valuation
Increase in investments by the auto majors due to the positive trend in the sector ,both locally as well as globally. This is due to a number of reasons including strict norms as for the freight carrying capacity, development of infrastructure, the golden quadrilateral programmmeetc as discussed in the report earlier. Increased innovation and technological development and hence need for a strong R&D at the company level.So further need for investments.
Pressure on prices due to tough local and global competition will initially shrink margins though may increase the sales. For forecasting the future performance of the companes the assumptions made are: Profit and loss a/c prepared based on
o Informtion and data about industry, and individual company in addition to that of the economy. o Average of the past five to six years used to arrive at forecated figures. o Elements of the P&l a/c are based as an average percent of past five year sales. o The sales growth is taken in the range of 30 -38%
Recommendations
Investors seeking long benefit can safely go for the investment in auto sector as the future prospects are quite bright. Sell tata share Hold Ashok Leyland share
Limitations Fundamental analysis is based on fundamentals of a company,but since an attempt is to value the future cashflows , there is a need to forecast. And so the study can be biased and may not have hundred percent accuracy.
Industry data and figures for each and every component are not available and so the results are affected.
Tables
Type of Vehicle Taxi Trucks Buses Three Wheelers Two Wheeler Car Total Commercial Use Vehicles Total Private Use Vehicles 7967 24577 199517 228030 68220 427547 Mumbai 35676 Kolkata 19588 50089 6903 5841 147603 157142 82421 304745 Chennai 9026 17976 7810 16407 286856 96598 51219 383454 Bangalore 2604 20822 7250 22837 281899 54746 53513 336645 Hyderabad 1320 22038 2384 20015 343433 30447 45757 373880 Delhi* 0 0 0 0 867404 236549 0 1103953 Ahmedabad 2671 6083 10564 25029 143695 22950 44347 166645
* Vehicles for Commercial Use in Delhi have already been phased out as per Supreme Court orders. Based on 50% of Excise Duty and Sales Tax rebate, the total cost of incentive to Central and State Governments and income generated from the project is estimated as given below: (Rs Crores) Scrapped Vehicle Population Commercial Use 68220 82421 51219 53513 45757 0 44347 345477 Private Use 427547 304745 383454 336645 373880 1103953 166645 3096869 Cost of Incentives Excise Duty 901 844 510 373 283 918 194 4023 Sales Tax 505 543 326 257 209 510 141 2493 Total 1406 1387 836 630 492 1428 335 6516 Income Generated from Project Modernfleet Excise Duty 901 844 510 373 283 918 194 4023 Sales Tax 505 543 326 257 209 510 141 2493 Total 1406 1387 836 630 492 1428 335 6516
City
Mumbai Kolkata Chennai Bangalore Hyderabad Delhi* Ahmedabad Total
* Vehicles for Commercial Use in Delhi have already been phased out as per Supreme Court orders. Source SIAM proposal on Project Modern Fleet submitted in July 2002
Assuming that all vehicles sold under the programme are replacements and as such additional sales, over and above the normal sale, there will be a revenue positive impact.
REFRERENCES
websites 1) http://www.indiabusiness.nic.in/ 2) http://www.india.gov.in
3) http://www.ibef.org 4) http://finmin.nic.in
5) [email protected]
Books 1) P Chandra, Financial management Theory and practice, Tata Mcgraw Hill,2006 2) R Palat, Fundamental Analysis for Investors,Vision books,1994 3) Bodie, Kane, Marcus, Mohanty, Investments, Tata Mcgraw HillPublishing company Limited, 2006
Capitaline Software
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