Published on 10/05/2017 12:11:11 PM | Source: Motilal Oswal Securities Ltd

Auto Sector Update Structural shift toward scooters and SUVs continues - Motilal Oswal

Posted in Broking Firm Views - Sector Report | #Auto Sector #Motilal Oswal #Sector Report


Structural shift toward scooters and SUVs continues

The big getting bigger – category leaders reinforce their dominance

* Demonetization puts brakes on growth of passenger cars and motorcycles.

* Value continues to migrate toward scooters and SUVs, driven by changing customer preferences.

* Uptrading in 2Ws/4Ws continues, as reflected in the increasing share of premium motorcycles and PVs priced more than ~INR800k.

* Category leaders getting stronger as competition hurts second/third ranked players more.

 

We took a deep dive into granular data on the Indian 2W/PV industry, observing continuance of bigger trends in FY17, along with increased dominance of category leaders in both 2W and 4Ws. While demonetization had stalled a revival, there are early signs of a 2W export market recovery. Key highlights:

 

Demonetization puts brakes on recovery, especially of 2Ws

Demonetization had stalled the recovery in the auto sector, primarily impacting the 2W segment due to its higher exposure to the rural market and lower financing penetration. Between November 2016 and March 2017, while PV volume growth slowed to 6% (v/s +11% over Apr-Oct 2016), 2W volumes fell 6% (v/s +16% over Apr- Oct 2016). However, we note that normalcy has been restored in PVs (volumes up ~10% in March 2017) and 2Ws have recovered to record flat YoY growth.

 

Value migration toward scooters/SUVs continues

The structural trend of customers preferring scooters in 2Ws and SUVs in 4Ws continued in FY17. Scooters’ share increased to ~31.8% of 2W volumes (+120bp YoY). Similarly, SUVs continued to grow faster than the PV industry (32% growth in UVs v/s +9.2% in domestic PVs), increasing its share to 24.8% of domestic PVs (+420bp YoY).

 

Premiumization continues in both 2Ws/4Ws

The trend of premiumization continued in both 2Ws and 4Ws, with customers upgrading to relatively premium products. In 2Ws, motorcycles >150cc grew by 22%, driving up the share of premium 2Ws by 190bp to 15.4% of domestic 2W volumes. In PVs, volumes of vehicles priced INR800k & above grew ~22% YoY, translating into a higher share of products priced INR800k & above to 41% (+100bp).

 

The big getting bigger: Category leaders gaining further dominance

Category leaders further strengthened their dominance in FY17, despite intensifying competition . In the executive segment, HMCL’s market share improved to 72% (v/s 61% three years back), despite the entry of TVS Victor. In scooters, HMSI’s market share expanded to ~57% (+170bp YoY), at expense of HMCL (-220bp) and TVS (- 60bp). In PVs, MSIL gained market share for the fifth consecutive year (since Manesar issue), now commanding ~47.4% share of the domestic PV industry.

 

New launches drive PV industry growth

FY17 domestic PV volumes grew 9.2% to 3.05m units, driven by ~30% growth in UVs and ~4% in cars. New products (including ramp-up of last year’s launches) drove entire growth, with 185% share of incremental volumes. The key volume drivers were Brezza, Baleno, Tiago, Kwid and Ignis.

 

2W exports showing signs of recovery; other players eating into market share of Bajaj Auto

After a prolonged period of weakness since 2HFY16, 2W exports are showing signs of recovery with ~12.5% growth in 4QFY17 (v/s -6% in FY17). With all the relevant players focusing on exports, the share of Bajaj Auto has reduced 660bp to ~52% of 2W exports (motorcycle export share shrunk by 580bp to 60%). HMSI gained the most, with a 400bp increase in exports share to ~12%.

 

Valuation and view

We prefer 4Ws over 2Ws/CVs due to stronger volume growth and a stable competitive environment. Our top picks are Tata Motors, Maruti Suzuki and Amara Raja. We also believe that MM is an attractive play on a rural market recovery.

 

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