The Auto industry consists of the following products segment and key companies

4 Wheelers (cars, UV etc) – Maruti, Hyundai, Tata motors, Ford etc. This is a fast growing sector of the market with the most action. Rising incomes and easier credit has resulted in growth in the industry. India is also developing into a Hub for exports especially for small and compact cars. This sub-sector is characterised by high competition and aggressive marketing. The key player is maruti with around 51% market share. The last 3-4 years have seen growths in excess of 15-20%. In addition competition is increasing in this segment with aggressive growth plans from Maruti, Tata motors and other foreign majors such as Toyota, GM, Hyundai etc. I have been looking at some of the companies in this sector and there are some good ideas. I will be posting on a few later.

2 wheelers (scooters, Bikes etc) – This has been a growth sector for the last decade. The annual volume is almost 8 Mn units making india one of the largest markets in the world. Bikes account for the majority (around 70 %??) of the demand with the rest taken by scooters and mopeds. The bike segment consists of the entry level bikes which are price sensitive, the mid-segment called the deluxe segment which is dominated by hero honda’s splendour and the top segment. The top segment has high growth currently, lower pricing pressure and shared between bajaj auto and hero honda. This sector has seen slowing down of growth recently and pressure on margins due to increase in raw material costs and increased competition.

Commercial vehicles ( LCV, MCV and HCV) – This sector is dominated by tata motors followed by Ashok leyland. The LCV and HCV sectors are seeing good growth due to development of infrastructure and the transportation model moving towards hub and spoke. The less than 16 ton segment is however seeing its share of the pie shrink. Competition is expected to increase due to foreign players such as Iveco and others. The latest quarter has been weak for the commerical vehicles sector. . The commerical vehicle industry is quite cyclical in nature and the companies in that sector are making an effort to reduce the impact by increasing the service, spares and export component of the business. The two companies in this sector Tata motors and ALL seem to be fairly priced. I will be posting on Ashok leyland soon.

Basic financials of the industry
The industry is characterised by economies of scale. The net margins are low (4-5%) and not likely to increase much due to competition and raw material pressures. The industry has a ROC of 20%+ and moderate compeititive advantages due to Entry barriers from scale, brands and first mover advantage. Rivalrly is not intense as yet, however competition is likely to increase when demand slows and foreign competition intensifies.

A more detailed Analysis of auto industry is updated in the worksheet (Business analysis_working_aug 2007) under ‘AUTO AND ANCILLARIES’

My notes on the power/capital goods and other suppliers

Capital goods suppliers

This sector is dominated by BHEL and ABB followed by several smaller players and Chinese manufacturers. BHEL accounts for almost 65% of capacity and market share. This sector has seen good growth in the last 3-4 years and should see continuing growth for the next couple of years. ABB has a smaller product range mainly for the power sector and industry automation. However it is more profitable company than BHEL and doing extremely well for the past few years.
The companies in this sector are characterized by high return on capital and good competitive advantages. The key competitive advantage is due to Scale, technology and an existing customer base. The companies in this sector are now investing in R&D and also targeting export markets as they increase in size.
This sector should see more competition due to the high demand from Chinese manufacturers, domestic OEM players and foreign players.The market recognizes the bright prospects of this sector and most of the companies in this sector seem to be fairly priced.

Other suppliers (power cable industry)

This industry is characterised by several players. The key ones are
KEI industries
Diamond cables
Nicco
Universal and torrent

The industry was loosing money during the period 2001-2004. Several players had negative networth and the stronger ones such as KEI had very small profits. Since 2004 due to the boom in the power sector, industry, Oil and gas and real estate, demand has soared and this has resulted in a turnaround for all the companies in the sector. Several of them such diamond have wiped out accumulated losses and are now profitable. The stronger and aggressive players such as KEI have invested in additional capacities and are now growing rapidly. There is now a huge demand in the domestic market and some of the export markets. Several companies in this sector are tapping this demand and doing well.

The industry is however cyclical with almost 70% cost due to raw material. The key RM is copper, aluminum and steel the prices for which have increased in the last few years and fluctuate rapidly. The industry has weak competitive advantages and the key strengths come from scale of operation, customer relationship and operational efficiencies. As a result during the cyclical downturn several companies lose money heavily.

KEI industries and Torrent cables are currently the most profitable players with ROC in excess of 30%. At the same time the other companies in the industry have also turned around in performance due to the strong demand. KEI industry is growing rapidly through organic growth via capacity additions, product range extensions and export markets. It is also looking out for acquisitions abroad. Torrent cables is also doing well and has fairly good financials. These two companies seem to be good investment candidates in the sector

The other companies have had a turnaround in the last few years and hence it may not be easy to predict how they will fare during the next downturn.

To get a better understanding of the dynamics of the power cable industry, the AR for KEI industries is a good starting point.