The Hindu Business Line : Auto co.s primed for explosive growth

Boosted by key domestic and global drivers, auto stocks should form an important part of the portfolio of investors with a penchant for growth stocks.

The roar you hear is of the automobile industry opening the throttle. A growth of 19 per cent in sales of all vehicles combined is noteworthy; more so the 41 per cent rise in sales of commercial vehicles. It is not surprising then that the annual convention of the Society of Indian Automobile Manufacturers (SIAM) on Thursday saw companies unveiling grand investment plans.

Investments totalling Rs 25,000 crore are planned by biggies such as Maruti Udyog, Tata Motors, Honda-SIEL and TVS Motor, put together. Many of these plans are already underway and part of the investments have been made. And the buoyant mood is unmistakeable.

What's interesting is that Honda Motor and Toyota are closer than ever before in their plans to enter the small-car market, which appears set to witness explosive growth. At least four new small-cars are likely to enter the market in the next couple of years from Maruti, Hyundai, General Motors, and Tata Motors, which is working on a platform to replace the Indica. And, of course, there is the much-awaited Rs 1-lakh car from Tata Motors.

Three growth drivers

Driving these ambitious plans are three major factors. First, the reduction in excise duty on small-cars, effected in the last Budget, which has clearly given a leg-up to sales in that category. The concession extended to small-cars has been the catalyst for Honda and Toyota to take a serious look at the options available to them in the small-car market.

Second, the Free Trade Agreement India signed with Thailand two years ago. As per the agreement, the so-called 82 early harvest items, which include a range of auto components, will be subject to zero duty when imported from Thailand into India from September 1. Both Toyota and Honda have major operations in Thailand and the FTA will help them integrate their Thai operations into their India plans. The option of importing critical components from their own operations/suppliers in Thailand confers a twin advantage for the Japanese majors. First, the time to market can be crashed as they do not have to wait for Indian component suppliers to invest in production capacities and, second, it confers a big price advantage as they can import duty-free.

And the final factor is that India is now reckoned as a low-cost global manufacturing base for small cars; Hyundai has already taken the lead in this respect. The Korean company's Indian unit is a major exporter of cars. Exports accounted for 39 per cent of total sales in 2005-06 and the stated plan is to take this to 50 per cent once the company's second plant goes on stream in the next couple of years.

Maruti is developing a new small-car model for introduction in 2008 both in India and abroad. Besides, its global alliance with Nissan is also set to produce another small-car meant for the global market and the proposed new plant in India will produce this model for sale in India and abroad.

Commercial vehicles

Meanwhile, the commercial vehicle (CV) segment is also passing through some exciting times and some realignment of forces appears likely. The CV industry is showing signs of evolving on the global pattern of prime movers consisting of large, multi-axle trucks between cities and small, one-tonne trucks for intra-city movement. Even as the Ace from Tata Motors catalysed this partly, sales of multi-axle, heavy trucks is showing a rising trend.

Clearly, the automotive industry is on the cusp of a long, sustained growth cycle and the dips, when they happen, may not be as damaging to the major players as in the past thanks to their growing international operations. Domestic economic cycles of boom and bust will be less of a bother as these companies increase their revenues from international operations. Whether it is Tata Motors, Mahindra & Mahindra, TVS Motor or Bajaj Auto (to name just a few), all the major players are now establishing a strong multinational presence across product segments.

All this should be good news for domestic component manufacturers — when the vehicle-makers grow they do too. But they need to quickly acquire the capacity — not just physical but technological and financial as well — to service the expected growth from manufacturers. To be sure, the cream of the components industry is already in place and also boasts of a globalised presence.

Auto and auto-component stocks are already market favourites and were active participants in the recovery phase of the market in the last three months. If you are an investor with an appetite for growth stocks, then automobile/auto-component stocks should form a dominant part of your portfolio — along with information technology stocks, that is!

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