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PVs: Expect swift recovery in volumes; MSIL to sustain share in near term

We hosted a call with Mr. Manohar Bhat, an auto industry veteran with over 25 years of experience in sales, marketing and product planning functions at OEMs such as Kia Motors, Maruti Suzuki (MSIL) and Hyundai. Key takeaways from the interaction:

PV industry to witness a swift recovery: Income levels of upper middle class households have been less impacted by the pandemic, resulting in pent-up demand during lockdowns, which should drive a swift recovery ahead. There is also healthy order-book and adequate finance availability which should support a demand rebound. Expects industry upturn to last for next 5 years, and industry can reach 4.5mn units by FY26 (11% CAGR over FY21-26E).

MSIL and Hyundai in favorable position in the near term: Customer sentiments have been impacted by Covid-19 lockdowns and increasing fuel prices, resulting in preference toward more affordable and better fuel-efficient vehicles in the near term, which is an area of strength for MSIL and Hyundai. Expects MSIL to sustain share in the near term.

Toyota and MSIL tie-up: Joint product development in UVs could help improve MSIL’s position in the Rs1mn+ price category. Successful launches in this category can support market share, but failure could see tapering of share to below 40% over the medium term. Media reports refer to upcoming jointly developed models such as above 4m SUV and MPV.

Subsidies for Hybrids: The government has not provided meaningful subsidies for strong hybrids. Considering industry feedback and increasing fuel prices, if the government provides subsidies, then MSIL and Toyota could be the key beneficiaries, and can see strong volume and market share gains. Hybrids provide a logical bridge for ICE to EV transition.

Diesel share to reduce for industry: Driven by upcoming regulatory norms (Real-time Driving Emissions in Apr’23), cost of ownership for diesel models will further increase, resulting in lower sales share. The price of diesel models can increase by up to Rs100,000 during RDE transition.

MSIL customer base includes conservative customers who seek reliable products, better fuel efficiency, low maintenance costs, strong service/spares network and better resale values. To sustain share over medium term, MSIL will also have to address the desirability factor. As the customers are upgrading to higher-priced vehicles (especially UVs), it is important for MSIL to have successful launches in these categories. Media reports refer to upcoming products such as Jimny off-roader, mini SUV (larger Wagon R), small hatchback and jointly developed products with Toyota.

Tata Motors has achieved market share gains on the back of new products, better quality and renewed aggression of dealers (due to increase in dealer margins). However, sustenance of market share would depend on the success of future products and competitive intensity. If Tata is able to find a strong partner (media reports indicate names such as Geely, Cherry and Greatwall as possible partners) for the India business, it will ensure healthy growth over the long term.

Mahindra & Mahindra has witnessed good bookings for its niche off-roader product Thar. The company is traditionally known for rugged models sold in upcountry markets, which needs to be the area of attention. Focusing on niche models such as Thar may not support sustenance of market share in the medium term.

Our view: We expect a strong recovery in PV volumes due to easing of lockdowns, healthy order-book and improving macros. Key beneficiaries of PV upcycle are Tata Motors (TP: Rs410), MSIL (TP:8,500) and MSS (TP: Rs325).

Key Takeaways

Kia Motors has done extremely well on 4Ps (Product, Positioning, Price and Place) for its models Seltos and Sonet. Customers for Seltos are older and have higher income levels in comparison to Sonet customers. Focus continues on the UV space, and may explore other segments such as MPVs and hatchbacks ahead. Network expansion remains a key focus area - through both normal and smaller formats. The objective is to reach capacity utilization of 300,000 units by next year, led by ramp-up in domestic and export segments.

EV adoption expected over medium- to long term: At current prices, cost of ownership is in favor of ICEs. Over the medium term, EV prices should reduce on reduction in battery costs, localization and scale benefits, making EVs attractive in comparison to ICEs, resulting in better adoption. To address range anxiety, driving range needs to be 400kms or higher. Initially, EV penetration is expected in higher price categories, but China has witnessed success in lowerpriced categories as well. For instance, SAIC-GM-Wuling mini EV (priced at $4,500) has witnessed success, which MSIL may try to replicate in India. Korean and Chinese OEMs are better-prepared than Japanese OEMs to address the EV opportunity. In addition, the expert expects EV adoption to happen in 2Ws initially, and then in PVs over the medium term.

Huge potential for car penetration in long term: India’s car penetration rate is very low in comparison to developed markets. All India penetration is also notably lower compared to major cities like Delhi, which provides strong long-term potential. Growth in PVs should be higher than 2Ws over the long term.

Online websites such as Cartrade are beneficiaries of growth and improving organized share in the used car market. These websites generate leads that are used by dealers and smaller OEMs (Volkswagen, Renault, Nissan, etc.) for slow-moving products.

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