Impact: Positive (Automotive OEMs/ OESs); Positive (Dealerships & Tier 2/3 Ancillaries)

Brief: Indian automobile production has been growing at 14.52% in FY19 YTD, as compared to 9.56%, same time last year. Exports of pan industry grew by nearly 26%, double to same time last year. The biggest surprise however came from Commercial Vehicle (CV) production/ sales growth of 51.9% and 41%, respectively. Industry profitability also highest since FY16.

As per recent SIAM data, Indian automobile production (all categories) has been expanding at 7.7% on average, over the last three years. Domestic demand is expanding much faster on average, growing at 8.3% over the last three years. Export growth has averaged 4.5% during the time under consideration. The real surprise comes while considering the data on a YTD basis. This way, production grew by 14.5% in YTD FY19, as compared to 9.6%, same time last year. While domestic demand grew by 12.7% (9.3%, previously), exports recorded a strong 25.97% (10.16%, previously).

Considering category wise data, the primary growth engine for the spurt is Commercial Vehicles, which are witnessing a production growth of 8.7% for a 10.9% growth in domestic sales – over a three-year average. CV exports have been near the 4.5% level in the time frame. However, when studied on a YTD basis, CV production expanded by 51.87% for a domestic sales growth of 41.06%, in FY19 as compared to (-) 9.24% and (-) 3.48%, respectively, same time last year. We attribute this to massive Government spending in infrastructure creation but reserve our view pertaining (for now) to considering this as a proxy of Capex renewal. Demand from abroad for Indian CVs have been especially strong though, with YTD growth recoded at 35.64%, as compared to (-) 33.08%, same time last year. The expansion in African and South Asian markets by Indian CV players deserves a special mention here.

Passenger Vehicle (PV) manufacturers on the other hand have been experiencing consistent demand with sales and production remaining in the 7.5% range, on average, over the last three years. In FY18, even though sales declined to around 6% as compared to 10.6%, the previous year – we attribute it to an unfavorable base effect, given demonetization induced strong sales in FY17 (a one-off event). On YTD terms, both sales and production remained consistent and near the annual average. An anomaly was however seen in the export numbers, where a decline of over (-) 2.9% was seen in YTD terms despite strong average growth nearing 6.7% over the last three years. We reckon this to be driven by delay in latest platform introduction in India – impacting export orders. Delay in the introduction of Volkswagen's "MQB A0 IN" platform in India is a case in point, as latest generation launches in export destination such as Mexico – are based on this platform.

Two & Three wheeler sales and production grew significantly in FY18 and the effect is seen in not only the average growth (three year) but also percolates in FY19 YTD data. Special mention is the export growth, which at 32.7%, doubled in FY 19 YTD as compared to same time last year. In terms of overall profitability and financial health, India's automotive sector collectively recorded highest margins (in PAT and EBITDA terms), since FY16. A sign of rising volumes and higher value created as demand for higher end products increases with rising per capita incomes.

YoY Change in overall Automobile production:

Source: CMIE; Acuité Research

Profitability (median range):

Source: CMIE Prowess; Acuité  Research