Auto sector after interest rate hike

The road got a little rocky for the automobile industry after the Reserve Bank of India slammed the brakes on runaway growth and credit availability in the country. Higher interest rates and a liquidity squeeze led all interest rate-sensitive sectors to cool off significantly, notably banking, automobiles and real estate. While home loans are down almost 40%, real estate is also struggling to boost sagging sales.

The automobile sector presents a somewhat confusing picture. The two wheeler industry has been the worst affected, with a drop of 15.1% in sales volume during the first four months of the current year. In the commercial vehicles (CV) segment, the HCV (heavy CVs) have seen a 4% drop over the same period, but LCVs (light CVs) grew 15% over the same period.
Maruti Udyog is likely to get good mileage from its strong presence in the growing passenger car segment and its head start over foreign rivals.Another strong performer has been the passenger car segment, which posted 12% growth in the first four months. Here, the domestic leader, Maruti Udyog, has posted domestic sales growth of almost 15%. This performance has been on the back of a credit squeeze and higher interest rates. Though new launches have helped the performance of Maruti, the strong underlying growth in the small and mid-sized segments is unmistakable.
Rapid growth in incomes in middle-class households, strong growth in employment numbers in services industries, and high salaries across the board are expected to keep cars rolling off the factory floors. The Indian market saw passenger car sales of 1.4 million units last year. This is expected to rise to three million by 2015. Compare this with four million car sales logged by Chinese makers last year. This is expected to grow to almost 10 million by 2010. Per capita car penetration is very low in India, compared to other developing countries like Sri Lanka and Indonesia, which means there’s significant room for growth. So the Indian car market has a long way to go on the back of strong economic growth, a burgeoning middle class and increasing urbanization.
The passenger car offers two options for investment, Maruti Udyog and Tata Motors. The latter derives only part of its income and profits from passenger cars; commercial vehicles are the main driver for the company. Tata Motors also brings two more complicating factors to the table: the new bet on the Rs 1 lakh car, and the reported acquisition bid for Jaguar and Land Rover. Both these factors could complicate the company’s financial position over the next few years, and could prove a drag on profits from other divisions if they don’t live up to their potential.
Maruti Udyog has very little to complicate its financial position over the next few years, and is fully poised to capture growth in the passenger car segment. The company’s recent launches have fared exceedingly well. Both the Swift Diesel and the SX4 have turned out to be a major draw for the company. The company has sorted out its ownership row with the government, and is benefiting from the increased focus by its parent. Maruti has planned aggressive model launches in the coming year and made a strong entry into the diesel segment. It also has plans for exports, with India as a small car manufacturing hub for the parent.
The external environment is also improving for the auto sector, as interest rates have already begun to ease up over the last month. The upcoming festival season should give a much needed boost to sales in the next quarter. Besides the diesel Swift, Maruti plans diesel variants of some of its other models, which will enable the company to cater to a much larger segment of Indian car buyers.
As the passenger car segment grows, however, competition will also grow, with a slew of launches by carmakers like Honda, Toyota, GM, Skoda, and Volkswagen. China is already seeing such heightened competition, and Indian markets are likely to crank up similarly. But it will be a few years before new entrants launch new models and scale up domestically.
Maruti therefore has a head start over foreign competitors. Maruti’s toughest challenge, though, will come from a domestic player, Tata Motors and its Rs 1 lakh car. —