[T.S.R:14625] Sector Update - Auto

 

Auto Sector - Passenger Vehicles (June 21, 2010)

Auto Sector - Passenger Vehicles Auto Sector - Passenger Vehicles Acceleration Begins… Demand for passenger vehicles is likely to accelerate over the next five years (20% CAGR during FY10-FY15) to 4.9 mn units, with an upward bias. More importantly, the demand will be healthy enough to absorb reasonable price hikes. However, it remains to be seen whether OEMs share our optimism and undertake price hikes. Our confidence stems from low penetration levels and sharp increase in the > Rs 200,000 income population, the key target audience. Vehicle penetration in this segment has declined from 150 per 1000 in 2005 (pop'n size – 55mn) to 108 per 1000 in 2010 (pop'n size – 148mn). This indicates that passenger vehicle demand lagged income growth. More importantly, the size of this income group is expected to reach 268mn by 2015, presenting huge growth potential. Another important factor is the abysmally low penetration level in the rural segment and limited geographical spread. We attribute this to the hitherto nascent size of the industry as well as limited competition. However, over the last few years, established players like Maruti Suzuki (MSIL), Hyundai, Tata Motors and M&M have increased their geographical reach, given the rising competition and industry size. We are confident that profitability can be maintained given sharp increase in the population of first time buyers (FTB). FTB shall prefer established brands given their low maintenance cost and higher resale value. We believe that players like MSIL, Hyundai,Tata Motors and M&M are best placed to tap new demand while losing market share in the urban areas. Given the pricing of the recent launches, we do not expect any further price cuts. Infact, expect price increases in order to ensure healthy resale value – one of the key determinants of buying a car in A2 and A3 segment. Given our outlook on demand and the source of demand, we believe that MSIL is best placed to capitalize on the same. We believe that the concerns over MSIL's loss of market share are overdone. Currency rather than competition is the biggest risk for MSIL. Despite factoring in 490 bps market share decline to 47.6% over FY10-FY12 (A1 and A2 segment), we find MSIL attractive on valuations. Reco Company CMP (Rs) Target (Rs) ACCUMULATE Maruti Suzuki India Ltd. 1,351 1,650 Click here to read report: Auto Sector - Passenger Vehicles

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