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Auto Sector Outlook 2016

Namrata Shah | 28 Mar, 2016  | Follow Author | Add to my Favourites 
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Auto Sector

In FY15, Indian auto Industry saw annual production of 23.37 (Care Ratings - Budget 2016 Analysis) million vehicles, growth of 8.86% over FY14. Automobile component sales grew by 11% in FY15 over FY14. Major contributor to this growth two wheeler and passenger car segment.

In India, 18 (Key Factors that will propel growth in Auto Industry, Economic Times, Mar 30, 2015) people per 1000 own vehicles compared to 809 people per 1000 in USA, 519 people per 1000 in the UK, and 101 people per 1000 in China. This indicates that per capita auto consumption is much lower than global average and thereby auto sector has lot of growth potential.

Key Factors that will drive growth of Automobile and corresponding auto ancillary industry are as follows:

1. Demographic dividend: India has 41% of its population below that age of 20, as per Census 2011. These young population has high aspiration for luxury products compare to elder generation. In addition, these young population is also benefitted in form of dual income families, which in turn has given rise to booming middle income class and higher disposable income. The graph below indicates increase in per capita income from $797.26 in 2006 to $1,262.64 in 2014, highlighting higher disposal income. Further, with adoption of 7th pay commission recommendation, the disposable income would increase. The combination of above factors has increased the proportion of population that can affordable to own car.

2. Interest rates and financing options - The first time car demand is coming young and middle class income segment. This working class population prefer to purchase car on loan and thereby majority of vehicle purchases are financed through financial institutions. So, high penetration of banks, ease and quick loan disbursement along with lower interest rates would drive the demand for automobiles. The graph below highlights reduction in repo rate in 2015, which directly reduces interest burden on leveraged automobiles.

3. Fuel prices - The price of petrol, diesel and CNG are derived from global crude prices. Currently, global crude oil prices are at historic low. Fuel prices form major portion of operating cost for any vehicle. The graph below highlights trend in petrol prices in Mumbai. It is seen from graph, that prices have fallen in last 2 years. If price persistently stays low, the operating cost would be less, this will encourage people to own and ply more cars. However, if the fuel prices increases, the operating cost of car would increase, thereby demand of cars would fall.

4. New car launches - New models of cars driven by technological innovation and preference for lower fuel mission are launched each year. Recently, competition among companies in auto sector has increased with increased in the frequency of new model launches. In addition, the high income segment is looking to upgrade their existing car model to luxury cars more frequently, thereby reducing the average ownership period. This will increase demand for automobiles that offers innovative features. In Auto show 2016, over 108 new product (Auto Expo 2016 draws to a close with 108 new product launches, IBNLive, Feb 2016) were launched which includes new car and motorcycle models.

5. Shift from Diesel to Petrol or CNG Vehicles: Diesel cars are more expensive than petrol cars, but have lower operating cost on account of higher fuel efficiency and low per litre cost of diesel. So, levy of one-time tax on retail price will widened the gap in cost of diesel and petrol cars, thereby wipe off the benefit of owning diesel cars. Further, many government policies (described below) discourages owning and plying diesel vehicles.

6. Wide distribution channel and excellent after-sales services - To reach to mass car aspirants across India, the car manufacturer have expanded their distribution network by providing effective after sales services and retaining customer loyalty.

7. Car aspirational product - With growth in per capita income, individual aspirations has increased and larger proportion of the population desires for change in lifestyle. This leads to increase in preference for cars over two-wheelers. Moreover, among four - wheeler category, as individual move up the income curve, their demand changes from hatchback cars to sedan, SUV cars and further to premium vehicles.

8. Factors of Production

a. Cost of Raw Material – Steel, aluminium, copper, zinc, rubber are major raw material used in automobile manufacturing process. Currently, prices of commodities are low, but if the price of raw material increases and if the company passes on the higher prices to its customer, then higher retail price per unit would negatively impacting the demand. However, if the company is not able to pass on higher cost to customers, then it would impact its profitability adversely.

b. Labour Cost - Lots of process in car manufacturing requires human intervention. Any workers unrest would adversely impact its production schedule .

9. Government policy

a. Ban on old diesel vehicles - The National Green Tribunal has banned all diesel vehicles which are more than 10 years old and all petrol vehicles which are more than 15 years old from plying on the roads in Delhi. This will increase demand for new vehicles.

b. Polluter pay price - New registration of premium and luxury diesel vehicles with engine capacity of 2000cc or more is ban in NCR region till Mar 31, 2016 based on supreme court ruling. This has adversely impacted the demand for luxury diesel vehicle. Further, Court has hinted at extending this decision to smaller diesel engine car. This will focus consumer to shift to either petrol or CNG cars.

c. Taxis and Radio Cabs - Taxis playing in Delhi including cabs of Car rentals companies like Ola, Uber will have to shift to CNG by Mar 31. This would have one time engine conversion cost on taxi operator and also deter them from purchasing diesel engine car for commercial purposes in future.

d. Levy of environment cess - In order to curb air pollution within NCR region, an environment tax of Rs 700 on light-duty commercial vehicles and Rs 1,300 trucks and other three-axle and above vehicles was levied on Oct 9, 2015. This tax is payable at all entry points of NCR region by all vehicles passing through the capital. However, on Dec 16, 2015, Supreme court has doubled the tax to Rs 1,400 (SC doubles green tax on commercial vehicles entering Delhi, Livemint, Dec 16, 2015) for light commercial vehicles and Rs 2,600 for trucks. This increases the operating cost of commercial vehicles.

10. Public transport boost - To decongest roads, Delhi government has increased number of bus fleet plying, increased the frequency AC buses and metro trains along with reserving metro coaches for professional upper middle classes. This may encourage people to prefer mass transport systems and leave their personal vehicles at home. Also, it is suggested by Supreme Court to offer incentive to citizen who prefer public transport. More government policies on similar lines, may lower sale of passenger car thereby impact future demand for cars.

11. Infrastructure Growth - The Government of India has been focusing on improving road infrastructure through National Highway Development Project (NHDP) and Pradhan Mantri Gram Sadak Yojna (PMGSY). Under these program, it targets to build 10,000 - 12,000 km of highways each year (Economic Times). Budget 2016 has given lot of emphasis of setting up road network.

12. Indirect factors - Agriculture is major source of income for people in rural India. Further, these farmers heavily rely on monsoon for its cultivation. So, if rainfall is below average, then income of rural households will be lower thus indirectly impacting vehicle sales. Budget 2016 has laid down policies to double farmers income. This will directly boost demand for tractors and two -wheelers and indirectly enhance the demand for four wheeler and premium car.

Existing Policy (MakeinIndia - Sector Automobile & Auto components, Mar 24, 2016)

- Currently, GOI allows foreign direct investment up to 100% under automatic route.

- Manufacturing and imports in this sector are exempt from licensing and approvals.

- Rebates is offered to encourage R&D expenditure.


Automotive Mission Plan 2016-26 (AMP 2026)

- AMP 2026 (Automotive Mission Plan 2016-26 unveiled: Here are the key highlights, Economic Times, Sep 02, 2015) aims to make Indian Automotive industry to be the engine of 'Make in India'.

- Auto Fuel & Emission norms - Following the revision of initial AMP policy, India will adopt BS-VI (Bharat Stage-VI) norms for all its passenger vehicles by 2020, skipping the transition through BS-V. BS-VI is the Indian equivalent of Euro Stage VI norms. Currently, only 50 cities in India comply with BS-IV norms, while the rest still follow BS-III norms. The BS-VI emission norms are fuel neutral. The current norms allow diesel vehicles to emit higher pollutant matter, but with adoption of BS-VI norms, this gap will narrow.

- End of Life Policy - AMP 2026 envisages to implement End of Life policy, whereby they seeks to retire older vehicles and components.

- The National Electric Mobility Mission (NEMM) Plan 2020 intends to have ~7 million electric and hybrid cars on road by 2020. FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicle) India scheme provides subsidy for infrastructure building, pilot projects, technology and R&D and creation of market related hybrid and electric vehicle. This will encourage people to shift to pollution free electric cars.

- Auto export hub - Indian automotive industry to increase its exports by nearly 35-40% of its overall production over 10 years. For this, large automotive clusters like Delhi-Gurgaon-Faridabad in the north, Chennai- Bengaluru-Hosur in south and Jamshedpur-Kolkata in east are developed.

Budget 2016 Impact

- Infrastructure cess in the range of 1 – 4% on passenger vehicles

    - 1% for small Petrol/LPG/CNG cars

    - 2.5% for small diesel cars

    - 4% for mid-size, large cars and SUVs

- Additional 1% luxury tax to be deducted at source on cars Rs. 10 lacs and more

- Extended NIL custom duty and 6% excise/CVD being extended on parts of electric vehicles and hybrid vehicles.


With favourable demographic profile of India and higher disposable income, the automobile sector have positive outlook. However, within the sector, the discouragement of diesel cars would change the trend to petrol and CNG cars, and further towards electric or hybrid cars in long run.


About Namrata Shah

Namrata Shah is a Chartered Accountant and an independent finance blogger. She loves analyzing companies financials, business models, corporate governance and other aspects of the companies. She has rich experience in research, valuation and audit, assurance & advisory function in reputed organisations. She blogs at .


For more information please write in to [email protected]

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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