Industry Analysis

Auto - Passenger Cars

Subject : Principles Of Bank lending

Prof. : Dr M Manickaraj

Submitted by
Anurag Agrawal
Roll no. 08
PGDM 16-18
General Profile of the Industry

The Indian auto industry is one of the largest in the world and Passenger Vehicle (PV)
segment has 14% share in automobile industry. India is fastest growing passenger vehicle market
by volume. Manufacturer from all over the world are coming to India to setup their plant and
manufacture passengers cars as Government of India has opened up the FDI channel to 100%
from 2016. The industry provides employment to large number of people and there are large
number of ancillary industries associated with this industry like auto components, tyre etc
providing raw material and various components to this industry. Hence the industry occupies a
place of strategic importance in the eyes of Government as various other industries are dependent
on it. Hence, we see a lot of policy support by Government to this industry.

The Industry shows steady growth in its production of number of units due to high
demand in domestic market and also due to Foreign companies setting their plant in India and
exporting their product to foreign countries. Experts are projecting India will become 3rd Largest
passenger vehicle Market by 2018. The industry has witnessed a growth of 7.2% in the FY2016.
The sales growth was supported by launch of new low cost model in the domestic market.
Though the world demand for passenger vehicles was down after the sub-prime crisis, slowly
and steadily economic has recovered from the shock and now it is growing at a steady pace.
Leading players in the industry

There are 14 passenger vehicle manufacturing companies in India but top 3 companies
constitute 70% of the market share.
The Following are the players in industry,

1. Maruti Suzuki India

2. Hyundai Motor India
3. Mahindra & Mahindra
4. Toyota Kirloskar Motor
5. Honda Cars India
6. Tata Motors
7. Renault India
8. Ford India
9. Volkswagen India
10. General Motors
11. Datsun
12. Nissan
13. Skoda
14. Fiat

Trends and developments

1. Government of India promotes foreign investment in the automobile industry by allowing
100 per cent FDI. The industry is delicensed and allows free import of automotive
components. Also, the Indian government does not lay down any minimum investment
criteria for this industry.
2. Under Union Budget 2016-17, the government has announced plans to make amendments
in Motor Vehicle Act to enhance road transport sector, mainly in passenger segment.
3. The government plans to encourage use of eco friendly automobiles such as hybrid
vehicles, electrical vehicles, CNG based vehicles in India.
4. Government taking Initiatives to set up manufacturing plants through Make in India.
5. The Automotive Mission Plan 2016-26 targets a fourfold growth in the automobiles
sector in India which includes the manufacturers of automobiles, auto components and
tractor industry over the next ten years.
6. NATRiP is setting up of R&D centers at a total cost of USD 388.5 million to enable the
industry to be on par with global standards
7. Japan based Suzuki Motor Corporation plans to invest USD 970.70 million for vehicle
production line at its new plant in Gujarat
 8. Jaguar Land Rover, the UK-based automotive company, plans to manufacture Land
Rover SUV for the local market and as well as for export, most probably at its plant in
Pune
9. General Motors plans to invest US$ 1 billion in India by 2020, mainly to increase the
capacity at the Talegaon plant in Maharashtra from 130,000 units a year to 220,000 by
2025
10. US-based car maker Chrysler has planned to invest Rs 3,500 crore (US$ 513.5 million) in
Maharashtra, to manufacture Jeep Grand Cherokee model
11. Volvo Group signed MoU with Indian Institute of Science to undertake research and
development of future automotive technologies. With the agreement, Volvo Group and
IISc will collaborate to strengthen the eco-system of innovation while undertaking
important research in the automotive sector
12. Major MNC and Indian corporate houses are moving towards taking cars on operating
lease instead of buying them
13. So, there is huge demand from companies like OLA, Uber as they provide convenience to
user without bearing huge cost of buying them.

Financial performance of the industry

Description 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Margin Ratios
EBITDA Margin(%) 13.65 13.12 12.33 11.14 10.26 12.1 14.78 10.25 13.74 14.54
EBIT Margin(%) 10.11 9.88 9.19 8.45 8.08 10.13 12.67 7.65 11.89 13.21
Performance Ratios
Asset Turnover(x) 1.34 1.32 1.41 1.63 1.53 1.63 1.51 1.3 1.52
Sales/Fixed Asset(x) 2.66 2.67 2.96 3.6 3.66 3.98 3.57 3.09 3.36
Efficiency Ratios
Receivable days 12.47 14.39 15.06 12.91 12.24 11.41 14.12 17.54 16.62
Inventory Days 18.34 18.36 17.38 16.6 17.95 15.13 15.2 19.67 19.79
Payable days 52.47 50.99 50.73 43.41 43.46 41.49 50.33 59.19 46.86
Financial Stability Ratios
Total
Debt/Equity(%) 0.06 0.1 0.16 0.15 0.18 0.11 0.19 0.33 0.27 0.22
Interest Cover(x) 46.46 22.5 19.45 20.52 27.39 68.99 34.83 15.65 27.56 65.43

Margin ratios suggest that there is decent profitability in the industry. The average profitability
is 10.96 % with standard deviation of 2% over last 10 years. The range is 7.65% to 13.21%

Performance Ratio
Sales/fixed asset is high indicating that assets in the industry are being utilized properly to
convert it into sales. The industry is efficiently utilizing its assets to convert into sales and hence
indicating good performance of the industry.
Efficiency Ratios
Payable days are more compared to receivable days showing low bargaining of supplier and
receivable period is low indicating low bargaining power of buyers. Inventory days are also low
suggesting low amount of current assets and low requirement of working capital funds.

Financial Stability Ratio

Debt equity ratio is low showing low leverage and interest coverage ratio is high indicating high
capacity to pay interest and principal of loans.

The growth in sales over the 10 years span have been 16.03% (CAGR) and similar trend was
found in raw-material cost which grew at 16.33% ( CAGR) during 2007-20016.

Demand drivers
The demand of the passenger vehicle and its subsequent growth was driven by following
factors,
1. The changing demographics of the country tilting towards young population in the
country. Young population is boosting demand for cars.
2. Rising incomes, widening of the consumer base has also been aided by expansion of the
middle class, increasing urbanization, and changing lifestyles
3. Greater access to credit eases the purchase of passenger vehicles. The Indian car finance
market is growing at a CAGR of 13.20% from the year 2010-15 and it is expected to
grow to USD 30.43 billion by 2020.
4. The developing roadways and strong policy support has been crucial in developing the
sector
5. Strong FDI equity inflow in the automotives sector and more investments in R&D for
making new high tech vehicles which are powered by eco-friendly fuel.
6. Payout of 7th pay commission as well as normal monsoon after two consecutive deficient
years of rainfall.

Growth prospects

1. During FY06-16, passenger vehicle segment witnessed the fastest growth, at a CAGR of
10.09 %
2. Domestic sales of passenger vehicles in India is expected to increase at a CAGR of
12.87% during 2016-26.
3. World is seeing India as Small-car manufacturing hub. General Motors, Nissan and
Toyota announced plans to make India their global hub for small cars.
4. India is fast emerging as a global R&D hub as India has comparative advantage in terms
of cost and strong education base.
5. The Indian luxury car market is estimated to expand at a CAGR of 25 per cent during
201220 and reach 150,000 units by 2020.
Profitability/attractiveness of the industry using the Porters model

Threat of new entrants

The threat of new entrant is low-medium as the industry is highly capital intensive, there is brand
loyalty and established firms enjoy economies of scale. But foreign players entering the market
with huge inflow of money into a deregulated FDI market increases the threat.

Bargaining power of suppliers

The bargaining power of suppliers is low as there is large number of supplier and limited number
of passenger vehicle manufacturer. Also, there are long term contracts between ancillary supplier
and Passenger vehicle manufacturer for specialized manufacturer- specific component and these
contracts are dictated by manufacturing company reducing the bargaining power of suppliers.

Bargaining power of buyers

Bargaining power of buyers is high, as there is variety of products of similar features are offered
in the market. The Product differentiation is low increasing the bargaining power of customers.

Availability of substitute products

The threat of substitute is low in the industry as public transportation is not fully developed in
our country. The convenience and representation of car as a status symbol further reduces the
threat of substitute to the product.

Competitive rivalry
The competitive rivalry among the manufacturer is high. As differentiation of product is low so
there is cut throat competition among the manufacturer to gain the customer. The competition
has turned more intense after the entry of foreign players like Volkswagen and Ford in low-
priced hatchback segment.
Rating of the industry
1. Importance to Economy
This industry is very important to the economy. The Total automobile sector accounts for
7.1 % of the GDP. Passenger vehicle constitute 14% of Automobile sector. The industry
also provides employment to large number of people. So risk is low.

2. Impact of industry specific government Regulations

Government regulations can severely affect the profit of this industry. E.g NGT put ban
on diesel powered vehicles which were 10 or more year old. The sales of diesel vehicles
were affected badly. Similarly Norway Govt. has proposed to ban all fuel based vehicle
till 2025. So, risk is high.

3. Growth in market Size

Market Size has grown over the year. India is the fastest growing market for passenger
vehicle and it is 5th largest market by volume. Experts are projecting India will become
3rd Largest passenger vehicle Market by 2018.

4. Inputs : Availability & Affordability

Risk is low as raw material is available in abundant and due to drop in demand and
subsequent prices of the metals all over the world have increased affordability of raw
material.

5. Diversification into various user segments

The diversification into various user segments is very high in this sector as line filling is
high in the industry and manufacturer firm have designed a product to take care the needs
of all income groups and their taste & preferences resulting in availability of product in
various variants. So risk is low.

6. Demand Supply Gap

The graph shows that production was more than the sales and the gap was high. Slowly
and steady gap is decreasing as sales are growing at a faster rate than the production.
Hence, Risk is moderate and it is decreasing.
 7. Threat of Substitute
Risk is low as public transportation in the country is not that developed. Moreover,
industry provide convenience of time of traveling to users which makes it difficult to
replace.

8. Cyclicality / Seasonality
There is seasonality in this industry. Sales are hiked during the festival season. In India,
there are many festivals dispersed all around the calendar & different regional celebrate
different festivals at different time in a year. So, regional sales have more risk of
seasonality but country-wise the risk is mitigated as low sales in some region is
compensated by aggregated sales in some other region. The sales are also affected by
business cycles of boom and recession. Hence, there is risk of cyclicality and seasonality.

9. Industry Profitability

Description 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
EBITDA 13.1 12.3 11.1 10.2 10.2 13.7
Margin(%) 13.65 2 3 4 6 12.1 14.78 5 4 14.54
EBIT 10.1 11.8
Margin(%) 10.11 9.88 9.19 8.45 8.08 3 12.67 7.65 9 13.21
EBIT 11.7 30.9 11.2 128.8 28.5
Growth(%) 16.33 5 8.24 7 4 1.45 1 8 8.02
13.8 27.2 123.0 27.4
PAT Growth(%) 10.05 7.51 6 7 -8.82 7.97 8 8 7.75

The above Chart shows that industry has fairly good margin and growth. Hence the risk is
low.

10. Industry level financial leverage

201
Description 2016 5 2014 2013 2012 2011 2010 2009 2008 2007
Total
Debt/Equity(%) 0.06 0.1 0.16 0.15 0.18 0.11 0.19 0.33 0.27 0.22
46.4 19.4 20.5 27.3 68.9 34.8 15.6 27.5
Interest Cover(x) 6 22.5 5 2 9 9 3 5 6 65.43

Industry level leverage is low and high interest coverage ratio. Hence risk is low.

11. Influence of parallel and unorganized market structure

Risk is low as the industry is highly capital intensive & regulated, it becomes difficult for
firm to run in an unorganized structure.
 12. International competitiveness
India is still importing its luxury cars from developed countries and domestic players
finds it difficult to compete with them. Export trend shown also shows a step decrease in
growth over the last 6 years but if we check 10 years data, industry has grown by CAGR
of 16 % during FY06-16. So, Risk is moderate

Sr. No. Parameters Score

1 Importance to Economy 9
2 Impact of industry specific government Regulations 3
3 Growth in market Size 9
4 Inputs : Availability & Affordability 9
5 Diversification into various user segments 9
6 Demand Supply Gap 6
7 Threat of Substitute 9
8 Cyclicality / Seasonality 5
9 Industry Profitability 9
10 Industry level financial leverage 8
11 Influence of parallel and unorganized market structure 8
12 International competitiveness 6
Total 90
Percentage 75.00%
Rating Low
Grade risk
Conclusion

Rating of the industry shows that the overall risk in the industry is low so banks can lend
to the automobile passenger car industry. But while lending due diligence should be done and
evaluation should be done for industry as government norms are changing to check the pollution
level in environment and to achieve sustainability the industry players will have to switch to
manufacturing of eco-friendly fuel powered vehicles so companies in the industry which have
developed R&D and production capacity of electric cars and other eco-friendly fuel powered
vehicles should be preferred.

The Indian Passenger Vehicle industrys domestic volumes are expected to grow by
8.5%-9.5% in FY2017. Though due to demonetization the sales were hit badly due to cash
crunch and instability in economic but it is expected to recover due to subsequent low interest
rate on bank credit to consumers. The industry is prone to cyclicality and seasonality so during
the appraisal of loan due importance should be given to study the macro-economic environment
in the country.

Passenger vehicle production is expected to become nearly triple by 2026 and sales
expected to increase at a CAGR of 12.87 per cent during 2016-26. All the above factors and the
good fundamentals like low leverage & high interest coverage ratio of the industry makes the
future prospects bright for this industry.

References
1. India Brand Equity Foundation (IBEF) Website. It is a Trust established by the
Department of Commerce, Ministry of Commerce and Industry, Government of India
2. Society of Indian Automobile Manufacturers (SIAM) website. A Industry body
representing leading vehicle and vehicular engine manufacturers in India