INVESTMENT FUND, IIM BANGALORE

AUTOMOBILE SECTOR REPORT, 2018

BY: TANYA SUDHAKAR

TABLE OF CONTENTS
1. INTRODUCTION ......................................................................................................................................... 2
2. MARKET OVERVIEW ............................................................................................................................... 2
3. PORTER’S FIVE FORCE ANALYSIS ...................................................................................................... 3
4. DEMAND AND GROWTH FORECAST .................................................................................................. 4
5. PROFITABILITY ......................................................................................................................................... 5
6. GROWTH DRIVERS AND OPPORTUNITIES ....................................................................................... 7

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1. INTRODUCTION
The Indian automobile industry is the 4th largest in the world, with y-o-y sales increasing at a rate of
9.5% and production at 2.57%. 7.1% of India’s GDP is accounted for by the auto industry. Attributing
to India’s young demographic, the two wheeler segment
dominates the market by volume with an 81% market share.
The passenger vehicle segment has a market share of 13%.
India is a prominent exporter of automobiles with a CAGR of
6.86% between FY13-18. Given the trends in growth rate and
the initiatives by the Government of India, India is expected to
be a market leader in the two wheeler and four wheeler segment
in the world by 2020.
The automobile industry in India has a market size of 29.07
million automobiles produced and 24.97 million automobiles sold in FY18. The sector is segmented
into four categories: Passenger Vehicles, Commercial Vehicles, Three Wheelers and Two Wheelers.

2. MARKET OVERVIEW
The automobile sector in India is segmented into four categories: Passenger Vehicles, Commercial
Vehicles, Three Wheelers and Two Wheelers.

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 1. Two Wheelers: The market leaders in two wheeler segment are Hero MotoCorp with sales of
more than 73.82 lakh motorcycles, Honda Motorcycles with sales of 57.75 lakh motorcycles,
TVS Motor Company with sales of 28.75 lakh and Bajaj with 19.74 lakh units. With a four firm
concentration ratio of approximately 90% and an HHI score of 0.2452, the market is moderately
concentrated.

2. Four Wheeler: Maruti Suzuki is India’s largest automobile company with a market share of
49.98%, followed by its closest competitors Hyundai Motor India with 16.3%, Mahindra &
Mahindra with 7.56% and Tata Motors with 6.39%. This brings the 4-firm concentration ratio
to 80.23% making the automobile industry in India an oligopoly. Furthermore, when we
calculate the HHI score, we obtain that the HHI score for the top four automobile firms in India
is H=0.286, indicating high concentration and competition.

3. Commercial Vehicles: Tata Motors is the market leader in the commercial vehicle segment
with a market share of 19%, followed by competitors Mahindra, Ashok Leyland and Eicher.
The four firm concentration is 92% with an HHI score of 0.277 indicating high competition and
concentration in the market.

4. Three Wheelers: The three wheeler market has six players in the market, with Bajaj being the
market leader with a market share of 57.71%. Other competitors include Piaggio Vehicles,
Mahindra, Atul Auto, TVS Motor Company and Scooters India. The market is oligopolistic and
highly concentrated with a four firm concentration of 97.01 and a HHI score of 0.404.
An overview of the market is as seen in the figure below:

3. PORTER’S FIVE FORCE ANALYSIS

• Threat of Substitutes – LOW
With an underdeveloped public transportation network in cities, threat of substitutes remains
low.

• Threat of New Entrants – MODERATE

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 The strong brand equity and capital intensive nature of the industry makes the threat of new
entrants moderate.

• Bargaining Power of Suppliers – LOW

Auto component manufacturers generally specialize in specific segments relating to one client
leading to a low bargaining power.

• Bargaining Power of Buyers – HIGH

Due to the large availability of choice of products in the same price range offered by different
manufacturers, customers enjoy a high bargaining power.

• Competitive Rivalry - HIGH

With foreign manufacturers like Ford and Volkswagen gaining market share due to new designs
and offerings the industry competition has intensified.

4. DEMAND AND GROWTH FORECAST

The domestic demand is forecasted to grow as below:

The increase in demand and estimated growth is due to a number of factors as below:

• Launch of new models, traction of popular models and increase in affordability

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 • Increase in rural and semi-rural infrastructure investment considering higher revenues from
normal monsoons
• Growth in rural sales compensating for slow growth in urban sales
• Safety features in vehicles keeping pressure on prices

Additionally, the growth in the sector will be aided by the stable fuel prices and launch of new vehicles.

5. PROFITABILITY

1. Operating Margin

There was an increase in operating margins from FY16 onwards and the trend is expected to continue
in FY19 as well. The increase is attributed to increasing realization and improvement in utilization
supporting the marginal growth in FY19. Margins will however be restricted in the near future due to
wage hikes, restricted pricing power amid intense competition and government mandated installation
of safety features.

2. RoCE

Major capital expenditures are expected in FY19 by large market players Maruti, Hyundai and PSA.
However, these will likely not involve issuing of debt or equity as the expenditures will be sponsored

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by the parent companies. Expectations of capacity utilization and profitability will drive the increase in
RoCE in FY19.

3. Interest Coverage

From FY14-18, the interest coverage ratio showed an increasing trend and is expected to improve
further considering higher realization and volumes. The increase is because of improvement in sales,
minimal debt driven capex and shift towards a debt free capital structure by major players.

4. Working Capital

Auto companies in India particularly in the cars and UV sector have high creditor days due to high
bargaining power over their suppliers which results in a negative working capital cycle that has
remained fairly stable over the years.

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6. OPPORTUNITIES AND THREATS

OPPORTUNITIES

• Growing Demand
India’s young demographic and with a rising income is a positive indicator for increasing
growth in the market. With the greater availability of credit and financing options the sales are
expected to show and increasing trend. The demand for commercial vehicles in particular is
increasing due to high level of activity in the infra sector.

• Policy Support
India is poised to be one of the largest auto manufacturers of the world, and with the
government’s support with initiatives like ‘Make in India’, ‘Automotive Mission Plan 2026’
and NEMMP 2020, growth is expected in FY19.

• Support Infrastructure and High Investment

Improvement in India’s road infrastructure and establishment of the auto ancillary industry will
help boost growth of the auto sector. The 5% of total FDI investments going into the automobile
sector are indicative of this.
THREATS

• Electric Vehicles
The government has announced that India will go all electric by 2030. This puts the industry
investments and jobs at stake, particularly in the auto component industry where a sudden
drop in demand is anticipated. Analysists, however, predict that the complete transformation
of the industry may not happen before 2040. While companies like Maruti have announced to
partner with Toyota to introduce Electric Vehicles in India by 2020, other market
players are watching the trends before deciding on their course of action.

• Emission Standards

Emission standards in India will be upgraded to BS5 by 2020 and BS6 by 2024, respectively.
Auto makers face the challenge of upgrading their existing technology to meet this
requirement. A very short time period between the upgrades and large investment required
makes it hard to achieve those standards.

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SOURCES
• www.ibef.org
• www.crisilresearch .com
• www.wikipedia.com
• https://www.livemint.com/Industry/RxgD9voRa0qciHIdDyJ6AM/Auto-industry-braces-for-
impact-as-India-begins-shift-to-ele.html
• https://auto.economictimes.indiatimes.com/news/auto-components/is-green-drive-a-threat-to-
indian-auto-components-industry/63295747