Sector Analysis Report on Indian Automobile Industry
By Kapil Israni [email protected] H&G H MANSUKHANI INSTITUTE OF MANAGEMENT
Sector Analysis Report on Indian Automobile Industry
1) INDIAN AUTOMOBILE INDUSTRY : AN OVERVIEW The automotive industry is one of the largest industries in India and is a key driver for growth in the economy. Owing to its deep forward and backward linkages with other sectors in the economy, the automotive industry has a strong multiplier effect on the economy. A well developed transportation system plays a vital role in the economic and industrial development of the country, where the Indian automotive industry has a crucial part to play It has been experiencing strong growth rates after delicensing of the industry in 1991, when major economic reforms took place in India.
The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. India manufactures over 17.5 million vehicles (including 2 wheeled and 4 wheeled) and exports about 2.33 million every year. It is the world's second largest manufacturer of motorcycles, India's passenger car and commercial vehicle manufacturing industry is the seventh largest in the world. According to recent reports, India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the world, growing 16-18 per cent to sell around three million units in the course of 2011-12. Growth in 2011-12 can be expected to be around 8.5%, based on the assumption of 3% - 3.5% growth in Agriculture & Allied sector, 8.0% - 9% growth in Industrial sector, and 10% growth in Services sector. (1) MAJOR PLAYERS A) Bajaj Auto It is market leader among the automobile companies in India. The Bajaj Group's flagship company is Bajaj Auto. It is the fourth largest two-wheeler and four-wheeler manufacturer in the world. The Bajaj Brand is renowned in countries like US, Europe, Latin America etc .It is also among the top Ten Indian Companies in market capitalization. The company has products in the segments like scooters, mopeds, motorcycles, three wheelers. B) TATA Motors Initially known as TELCO, Tata Motors is the largest manufacturer of commercial vehicle in India and also the largest private sector company. The company produces light commercial vehicles, passenger cars, commercial vehicles and multi-utility vehicles. The latest innovation of the Tata Motors is the Nano car which is called the people's car. This one lac rupees car has created a revolution in the history of the automobile industry across the world.
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Sector Analysis Report on Indian Automobile Industry
C) Maruti Suzuki It is the company which has ushered revolution in the industry of Indian cars. The Company is the result of the alliance of Japan's Suzuki and Maruti. It is the first Indian company which manufactured about one million vehicles. The motto of the largest Automobile Company of India was to offer low cost and fuel efficient vehicles. The company produces Zen, Maruti 800, Maruti Esteem, Maruti Omni etc. D) Hero Honda The company is the result of the amalgamation between Japanese Honda Motors Company and India's Hero Honda Group in 1993.This is the single largest two-wheeler company of India. Hero Honda Motors Ltd is the market leader for being the largest Indian motorcycle company for selling CBZ and also the most fuel efficient one. E) Ashok Leyland It is the second largest key player among the commercial vehicles in India. The company manufactures Vestibule buses, Haulage vehicles, 18-82 seaters single and double decker buses etc. The six manufacturing units of the company can produce 77,000 vehicles at a time 3) AUTOMOBILE SEGMENTS
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Sector Analysis Report on Indian Automobile Industry
The Original Equipment Manufacturers (OEMs) are at the top of the auto supply chain, Most of the Indian OEMs are members of the Society of Indian Automobile Manufacturers (SIAM), while most of the Tier-1 auto component manufacturers are members of the Automobile Component Manufacturers’ Association (ACMA). All of them are in the organised sector and supply directly to the OEMs in India and abroad or to Tier-1 players abroad. Tier-2 and Tier-3 auto-component manufacturers are relatively smaller players. Though some of the Tier2 players are in the organised sector, most of them are in the unorganised sector. Tier-3 manufacturers include all auto-component suppliers in the unorganised sector, including some Own Account Manufacturing Enterprises (OAMEs) that operate with one working owner and his family members, wherein manufacturing involves use of a single machine such as the lathe. A strong recovery in volumes across segments such as cars & UVs (28 per cent), commercial vehicles (35 per cent), two-wheelers (26 per cent) and tractors (28 per cent) enabled a 26 per cent growth in sales of OEMs.
4) CURRENT SCENERIO 4) A) INDUSTRIES CONCENTRATION Market concentration increased due to TAFEs acquisition of Eicher Motors tractors business in 2005-06; it intensified further in 2007-08 with M&Ms acquisition of Punjab Tractors Ltd (PTL), which is reflected in a healthier Herfindahl-Hirschman Index (HHI). For the purpose of comparison, we have bifurcated HHI values into the following three categories: A) For 0-1000 index value B) For 1000-1800 index value C) For index value 1800 and above 4) B) TRENDS Rapid growth of national economy of BRIC countries (including Brazil, Russia, India, and China) has enabled a growing section of population of these countries to purchase cars. As a result of this, leading auto manufacturers of world are setting up factories in emerging markets, in order to serve potential consumers better as well as reduce manufacturing and shipping costs. In addition, these arrangements are enabling leading global auto- manufacturers to compete with local auto manufacturers that were flourishing in absence of quality competition. : concentration in the industry is low : concentration in the industry is moderate : concentration in the industry is high
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Sector Analysis Report on Indian Automobile Industry
4) C) PORTER 5 FORCE MODEL (PRICING POWER & COMPETITION) Supply Demand The Indian automobile market has some amount of excess capacity. Largely cyclical in nature and dependent upon economic growth and per capita income. Seasonality is also a vital factor. Barriers To Entry High capital costs, technology, distribution network, and availability of auto components. Bargaining Power of Suppliers Bargaining Power of Customers Competition High. Expected to increase even further. Very high, due to availability of options. Low, due to stiff competition.
4) D) INDUSTRY CAPACITY
4) F) INDUSTRY LIFE CYCLE The life cycle stage is growth Life Cycle Reasons The market for manufacturing motor vehicles is consistently increasing. The products manufactured by this industry are profitable. Companies have been consistently opening new plants and employing over the past five years. Industry value added has been rising, along with the rise in GDP.
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Sector Analysis Report on Indian Automobile Industry
4) E) MARKET SHARE CAPACITY
5) MACRO & MICRO ECONOMICS
?
Interest Rate: In its latest Annual policy review on 03rd May’11, the Reserve Bank of India (RBI) hiked the key ‘Repo’ rate by 50 bps from 6.75% earlier to 7.25% and the ‘Reverse Repo’ rate by 50 bps from 5.75% earlier to 6.25%. With these hikes, the RBI has raised, in total, the ‘Repo’ rate by 250 bps and 5|P a ge
Sector Analysis Report on Indian Automobile Industry
the ‘Reverse Repo’ rate by 300 bps since Mar’10 when it began the tightening process. Tightening of monetary policy conditions (RBI has hiked the repo & reverse repo rates 9 times since Mar’10 in order to control inflation) has led to hikes in the lending rates of major Banks which put pressure on margins as the sector is not able to pass through rising input costs.
6) INDUSTRY DRIVER & CHALLENGES ? Composition of costs and productivity o o ? Advantage of low labour costs in India Low employee welfare leading to reduction in labour productivity
Infrastructure o Roads, Railways, Ports, Power
?
Human Resource Development According to the AMP, it is estimated that the automotive industry would require the following: o o o Management and General Skilled workers Unskilled workers : 28 per cent or 7 million : 62 per cent or 15.5 million : 10 per cent or 2.5 million
7) Competitive Analysis ? Firstly, global sourcing of components from China brings savings of nearly 17-20% to the table (as against the 15-17% in the case of India) mainly due to their scale economies, lower power costs7 (0.061 kWhr/USD in China as against 0.095 kWhr/USD in India), reduced freight, local government concessions, lower transactional costs8 (30% lower for auto component manufacturers in China) etc. With the increasing competition for orders from global OEMs, Indian component exporters might lose out in the price wars if they start with a higher cost base.
?
The profit pool in the Chinese passenger car industry shows higher margins for OEMs (46% in China as against 17% elsewhere in the world, while service accounts for only 14% of the profits of the industry in China as against 57% world over).
8) FINANCIAL ANALYSIS In 2010 compared with 2009, the automotive supply industry managed to cut cash-to-cash (C2C)* by 13%, more than offsetting the deterioration in performance seen in prior seven years (resulting in C2C dropping by 7% between 2002 and 2010). 6|P a ge
Sector Analysis Report on Indian Automobile Industry
Companies/Ratios
Bajaj Auto
Hero Honda
TVS Motors
Current Ratio Quick Ratio Earnings Per Share(Rs) Book Value(Rs) Net Profit Margin (%) P/E Market Capitalization Sales(Rs,Cr)
0.84 0.73 116.70 202.40 7.4 58.80 416688.51 11508.50
0.46 0.31 111.80 173.50 10.3 15.30 358439.06 15758.20
1.15 0.68 5.70 36.40 0.82 32.60 34206.27 4363.10
9) FUTURE OUTLOOK & CONCLUSION “To emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of USD 145 billion accounting for more than 10 per cent of GDP and providing additional employment to 25 million people by 2016” is the vision put forward by the Ministry of Heavy Industries and Public Enterprises. Going forward it is evident that the automotive industry in India offers immense potential in terms of sales and employment opportunities. Rising disposable incomes and the new wave of consumerism arising out of it are going to be key drivers. Foreign direct investments and manufacturing companies including global majors are going to setup manufacturing facilities first and then develop R&D services, both on a large scale. By promoting fuel efficiency, India can reduce its dependence on foreign oil. By reducing its fuel subsidies, the government could direct that spending to social programs.
Automobile penetration in India is only seven or eight per 1,000 people, compared with nearly 500 per 1,000 people in mature markets. To increase this ratio, manufacturers should campaign for better infrastructure, further reduce the total cost of car ownership, and bring financing and insurance models up to modern global standards. According to the SIAM annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads.
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doc_530077547.pdf
By Kapil Israni [email protected] H&G H MANSUKHANI INSTITUTE OF MANAGEMENT
Sector Analysis Report on Indian Automobile Industry
1) INDIAN AUTOMOBILE INDUSTRY : AN OVERVIEW The automotive industry is one of the largest industries in India and is a key driver for growth in the economy. Owing to its deep forward and backward linkages with other sectors in the economy, the automotive industry has a strong multiplier effect on the economy. A well developed transportation system plays a vital role in the economic and industrial development of the country, where the Indian automotive industry has a crucial part to play It has been experiencing strong growth rates after delicensing of the industry in 1991, when major economic reforms took place in India.
The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. India manufactures over 17.5 million vehicles (including 2 wheeled and 4 wheeled) and exports about 2.33 million every year. It is the world's second largest manufacturer of motorcycles, India's passenger car and commercial vehicle manufacturing industry is the seventh largest in the world. According to recent reports, India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the world, growing 16-18 per cent to sell around three million units in the course of 2011-12. Growth in 2011-12 can be expected to be around 8.5%, based on the assumption of 3% - 3.5% growth in Agriculture & Allied sector, 8.0% - 9% growth in Industrial sector, and 10% growth in Services sector. (1) MAJOR PLAYERS A) Bajaj Auto It is market leader among the automobile companies in India. The Bajaj Group's flagship company is Bajaj Auto. It is the fourth largest two-wheeler and four-wheeler manufacturer in the world. The Bajaj Brand is renowned in countries like US, Europe, Latin America etc .It is also among the top Ten Indian Companies in market capitalization. The company has products in the segments like scooters, mopeds, motorcycles, three wheelers. B) TATA Motors Initially known as TELCO, Tata Motors is the largest manufacturer of commercial vehicle in India and also the largest private sector company. The company produces light commercial vehicles, passenger cars, commercial vehicles and multi-utility vehicles. The latest innovation of the Tata Motors is the Nano car which is called the people's car. This one lac rupees car has created a revolution in the history of the automobile industry across the world.
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Sector Analysis Report on Indian Automobile Industry
C) Maruti Suzuki It is the company which has ushered revolution in the industry of Indian cars. The Company is the result of the alliance of Japan's Suzuki and Maruti. It is the first Indian company which manufactured about one million vehicles. The motto of the largest Automobile Company of India was to offer low cost and fuel efficient vehicles. The company produces Zen, Maruti 800, Maruti Esteem, Maruti Omni etc. D) Hero Honda The company is the result of the amalgamation between Japanese Honda Motors Company and India's Hero Honda Group in 1993.This is the single largest two-wheeler company of India. Hero Honda Motors Ltd is the market leader for being the largest Indian motorcycle company for selling CBZ and also the most fuel efficient one. E) Ashok Leyland It is the second largest key player among the commercial vehicles in India. The company manufactures Vestibule buses, Haulage vehicles, 18-82 seaters single and double decker buses etc. The six manufacturing units of the company can produce 77,000 vehicles at a time 3) AUTOMOBILE SEGMENTS
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Sector Analysis Report on Indian Automobile Industry
The Original Equipment Manufacturers (OEMs) are at the top of the auto supply chain, Most of the Indian OEMs are members of the Society of Indian Automobile Manufacturers (SIAM), while most of the Tier-1 auto component manufacturers are members of the Automobile Component Manufacturers’ Association (ACMA). All of them are in the organised sector and supply directly to the OEMs in India and abroad or to Tier-1 players abroad. Tier-2 and Tier-3 auto-component manufacturers are relatively smaller players. Though some of the Tier2 players are in the organised sector, most of them are in the unorganised sector. Tier-3 manufacturers include all auto-component suppliers in the unorganised sector, including some Own Account Manufacturing Enterprises (OAMEs) that operate with one working owner and his family members, wherein manufacturing involves use of a single machine such as the lathe. A strong recovery in volumes across segments such as cars & UVs (28 per cent), commercial vehicles (35 per cent), two-wheelers (26 per cent) and tractors (28 per cent) enabled a 26 per cent growth in sales of OEMs.
4) CURRENT SCENERIO 4) A) INDUSTRIES CONCENTRATION Market concentration increased due to TAFEs acquisition of Eicher Motors tractors business in 2005-06; it intensified further in 2007-08 with M&Ms acquisition of Punjab Tractors Ltd (PTL), which is reflected in a healthier Herfindahl-Hirschman Index (HHI). For the purpose of comparison, we have bifurcated HHI values into the following three categories: A) For 0-1000 index value B) For 1000-1800 index value C) For index value 1800 and above 4) B) TRENDS Rapid growth of national economy of BRIC countries (including Brazil, Russia, India, and China) has enabled a growing section of population of these countries to purchase cars. As a result of this, leading auto manufacturers of world are setting up factories in emerging markets, in order to serve potential consumers better as well as reduce manufacturing and shipping costs. In addition, these arrangements are enabling leading global auto- manufacturers to compete with local auto manufacturers that were flourishing in absence of quality competition. : concentration in the industry is low : concentration in the industry is moderate : concentration in the industry is high
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Sector Analysis Report on Indian Automobile Industry
4) C) PORTER 5 FORCE MODEL (PRICING POWER & COMPETITION) Supply Demand The Indian automobile market has some amount of excess capacity. Largely cyclical in nature and dependent upon economic growth and per capita income. Seasonality is also a vital factor. Barriers To Entry High capital costs, technology, distribution network, and availability of auto components. Bargaining Power of Suppliers Bargaining Power of Customers Competition High. Expected to increase even further. Very high, due to availability of options. Low, due to stiff competition.
4) D) INDUSTRY CAPACITY
4) F) INDUSTRY LIFE CYCLE The life cycle stage is growth Life Cycle Reasons The market for manufacturing motor vehicles is consistently increasing. The products manufactured by this industry are profitable. Companies have been consistently opening new plants and employing over the past five years. Industry value added has been rising, along with the rise in GDP.
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Sector Analysis Report on Indian Automobile Industry
4) E) MARKET SHARE CAPACITY
5) MACRO & MICRO ECONOMICS
?
Interest Rate: In its latest Annual policy review on 03rd May’11, the Reserve Bank of India (RBI) hiked the key ‘Repo’ rate by 50 bps from 6.75% earlier to 7.25% and the ‘Reverse Repo’ rate by 50 bps from 5.75% earlier to 6.25%. With these hikes, the RBI has raised, in total, the ‘Repo’ rate by 250 bps and 5|P a ge
Sector Analysis Report on Indian Automobile Industry
the ‘Reverse Repo’ rate by 300 bps since Mar’10 when it began the tightening process. Tightening of monetary policy conditions (RBI has hiked the repo & reverse repo rates 9 times since Mar’10 in order to control inflation) has led to hikes in the lending rates of major Banks which put pressure on margins as the sector is not able to pass through rising input costs.
6) INDUSTRY DRIVER & CHALLENGES ? Composition of costs and productivity o o ? Advantage of low labour costs in India Low employee welfare leading to reduction in labour productivity
Infrastructure o Roads, Railways, Ports, Power
?
Human Resource Development According to the AMP, it is estimated that the automotive industry would require the following: o o o Management and General Skilled workers Unskilled workers : 28 per cent or 7 million : 62 per cent or 15.5 million : 10 per cent or 2.5 million
7) Competitive Analysis ? Firstly, global sourcing of components from China brings savings of nearly 17-20% to the table (as against the 15-17% in the case of India) mainly due to their scale economies, lower power costs7 (0.061 kWhr/USD in China as against 0.095 kWhr/USD in India), reduced freight, local government concessions, lower transactional costs8 (30% lower for auto component manufacturers in China) etc. With the increasing competition for orders from global OEMs, Indian component exporters might lose out in the price wars if they start with a higher cost base.
?
The profit pool in the Chinese passenger car industry shows higher margins for OEMs (46% in China as against 17% elsewhere in the world, while service accounts for only 14% of the profits of the industry in China as against 57% world over).
8) FINANCIAL ANALYSIS In 2010 compared with 2009, the automotive supply industry managed to cut cash-to-cash (C2C)* by 13%, more than offsetting the deterioration in performance seen in prior seven years (resulting in C2C dropping by 7% between 2002 and 2010). 6|P a ge
Sector Analysis Report on Indian Automobile Industry
Companies/Ratios
Bajaj Auto
Hero Honda
TVS Motors
Current Ratio Quick Ratio Earnings Per Share(Rs) Book Value(Rs) Net Profit Margin (%) P/E Market Capitalization Sales(Rs,Cr)
0.84 0.73 116.70 202.40 7.4 58.80 416688.51 11508.50
0.46 0.31 111.80 173.50 10.3 15.30 358439.06 15758.20
1.15 0.68 5.70 36.40 0.82 32.60 34206.27 4363.10
9) FUTURE OUTLOOK & CONCLUSION “To emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of USD 145 billion accounting for more than 10 per cent of GDP and providing additional employment to 25 million people by 2016” is the vision put forward by the Ministry of Heavy Industries and Public Enterprises. Going forward it is evident that the automotive industry in India offers immense potential in terms of sales and employment opportunities. Rising disposable incomes and the new wave of consumerism arising out of it are going to be key drivers. Foreign direct investments and manufacturing companies including global majors are going to setup manufacturing facilities first and then develop R&D services, both on a large scale. By promoting fuel efficiency, India can reduce its dependence on foreign oil. By reducing its fuel subsidies, the government could direct that spending to social programs.
Automobile penetration in India is only seven or eight per 1,000 people, compared with nearly 500 per 1,000 people in mature markets. To increase this ratio, manufacturers should campaign for better infrastructure, further reduce the total cost of car ownership, and bring financing and insurance models up to modern global standards. According to the SIAM annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads.
7|P a ge
doc_530077547.pdf