Key trends that are likely to play out over the next few years in the sector
* Our analysis of the past 10 years trend in automobile demand indicates that volume growth recovers sharply when there is strong rise in real income. Demand rises at a strong pace when real income grows sharply even if cost of ownership also rises at a fast clip. Real income growth is the biggest driver of automobile demand in India, in our view.
* Automobile demand was quite strong during FY07-10 (double-digit growth) when growth in real income per capita averaged around 7% while cost of ownership was flattish. However, over the past two years (FY12-14), demand has slumped as cost of ownership has increased sharply while growth in real income per capita has declined to an average of 4%. We expect real income per capita to slowly improve to 5-6% levels while cost of ownership to remain subdued, which should aid in 10-12% CAGR (compound annual growth rate) in automobile demand over the next three years (FY14-17).
* A divergent trend was seen to the above highlighted thesis in case of the utility vehicle segment growth. The utility vehicle sector (including SUV, multipurpose vehicle and vans) has grown at a faster pace over the past 10 years than passenger cars (17% CAGR versus 13% CAGR) despite a sharper increase in cost of ownership. We believe the key reason for such a trend was the strong growth in the mini-SUV (sports utility vehicle) segment, which attracted lower excise duty rates.
* We expect mini-SUV demand to outstrip passenger car demand as the mini-SUV segment takes off. We believe FY16 could be a strong year for the UV sector as manufacturers will launch four new SUVs and two MPVs (multipurpose vehicles).
* In the passenger car space, excise duties have been cut sharply from 24% in FY04 to 8% currently while in the utility vehicle sector, excise duties have remained at 24%, which led to higher ownership cost for UVs versus passenger cars.
Raise target price for Maruti Suzuki: We have increased our target price for Maruti Suzuki to R2,025 (from R1,900 earlier) due to an increase in our multiples to 15x (from 14X), based on September 2015e EPS. We have increased our multiples for Maruti Suzuki as some of the concerns on the Gujarat plant structure have eased after the managements clarification that they will put the proposed structure to vote with the minority shareholders. New model launches will be the key driver of volumes for Maruti Suzuki over the next three years (FY15-17) and will likely contribute 40% of incremental volumes.
Kotak Institutional Equities