Auto industry in second gear

Despite current economic slowdown, the sector is poised to grow in long-run
Auto industry in second gear

Automobile sector in India is one of the key contributors to country’s GDP.  Over the past decade, Indian automobile industry has been amongst the fastest growing, globally. While currently the industry is going through a down turn, we remain positive on the long-term growth prospects.

Impact of slowdown

Slowdown in the economy has had a negative impact on the demand for automobiles. Besides, factors such as high interest rates, rising fuel prices and inflation contributed towards the trend. In order to keep inventory under control, various players across the segment have undertaken production cuts over the past few months. Some manufacturers have also decided to go slow on announced capacities. However, these are only near term concerns for the industry and the long term growth opportunities stay intact.

Medium and Heavy Commercial Vehicle (MHCV) segment is highly cyclical in nature and more vulnerable to slowdown in economic activity. The segment is going through one of the worst phases, but over the medium term situation is expected to improve. Good monsoon, coupled with initiatives taken by the Government to clear bottlenecks on the existing projects, could positively play on truck demand in the medium term.

Passenger vehicle market in India has been evolving nicely over the past few years. Global players are optimistic about the future growth potential and hence are setting up shops in India. India’s mushrooming middle-class population and improving lifestyle have attracted almost all the global auto majors into the country. Car penetration levels are very low as compared with most other developed and developing economies and that in itself provides a huge opportunity. However, as the economy improves growth is expected to get back on track.

Two wheeler sector plays a key role in a country like India, where majority of population lives in rural or semi-urban areas without adequate transportation facilities. Good penetration levels and strong presence in rural areas make the segment relatively less vulnerable to slowdown. Accordingly, the segment is relatively better placed as compared to others.

Players stand to benefit

Rural demand has held up well in current economic crisis. Companies having significant presence in rural areas have indicated growth in demand. Good monsoons coupled with rising food MSP is expected to keep rural demand growing and players like Hero MotoCorp, Maruti Suzuki and Mahindra & Mahindra stand to benefit from the same.

In recent times, rupee has been in news given its sharp depreciation as against the dollar. Amongst the key listed auto makers, this is positive for Bajaj Auto, as 35-40 per cent of the total sales volume come by way of exports. For most other companies, export forms under 15 per cent of the volumes and hence the impact is not significant. On the other hand, Maruti Suzuki gets negatively impacted to a certain extent by this trend.

While there will be slowdown hiccups in between (as is the case currently), but over the longer term the industry is poised to grow. BSE Auto index has outperformed the Sensex over the 1 year, 3 year and 5 year period. For investors looking for long term investment opportunities, automobile sector is the ideal place.

 

 

 

 

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