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Overview

* Indian automobile industry is fifth largest in world. It is estimated that the entire Auto sector provides employment to ~37mn people, directly and indirectly. It accounts for 7.1% of the overall GDP of India and ~49% of the manufacturing GDP. Indian automobile industry witnessed a total FDI inflow of USD 25.85bn between April 2000 and March 2021, i.e. 5% of total FDI.

* In terms of volume, the industry is dominated by two-wheelers due to rising middle class income group coupled with younger population. Overall, the Indian market remains under penetrated with just 32 vehicles in use per one thousand people while developed markets have significantly higher penetration.

* The auto industry has been under stress since 2018 caused by the various headwinds such as macroeconomic slowdown, NBFC crisis, Introduction of BS6 norms and the Covid-19 pandemic. These factors impacted the demand and led to a decline in sales volume subsequently impacting the profitability of Indian automakers significantly.

* The government of India is actively taking initiatives to revive and support the underperforming auto industry of India, which is a major source of employment. The GOI aims to make India a global hub for auto manufacturing and R&D. It has set up National Automotive Testing and R&D Infrastructure Project (NATRiP) centers as well as National Automotive Board to act as facilitator between the Government and the industry.

* We believe the auto industry has turned a corner and is ready for another growth cycle with government support and revival in the economy, the auto industry is expected to bounce back in the coming years. Aided by a young population and growth in household income, it is expected vehicle penetration per thousand people will reach 72 by 2025.

* Further investments in R&D and a focus on domestic manufacturing are expected to drive automotive growth, the industry is poised to grow at a CAGR of 17% to reach USD 300bn from USD 118bn in 2020 and become the third largest in the world.

* Our top picks in the sector are Maruti Suzuki, Tata Motors and Eicher Motors

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