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CRISIL CRBCustomised Research Bulletin

May 2013
Sector Focus: Automobile
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Foreword

In this edition of the Customised Research Bulletin, we present our views
on the automobile industry and its major segments.

The recent slowdown in the automobile industry for two consecutive
years has raised concerns on the long-term growth prospects of the
Indian automobile industry. Taking a closer look at the key factors
affecting demand over the last few years, we believe that some of these
trends are reversing and the demand for automobiles will revive in the
near term. However, the recovery may not be sharp.

Income and the cost of ownership - two key factors affecting demand for
passenger vehicles, were both negatively impacted during the last two
years. These factors typically act countercyclically, resulting in relatively
stable growth for the industry. Post June 2010, the cost of ownership has
risen sharply on account of deregulation of petrol prices. This along with
the economic slowdown has resulted in industry growth rate touching
decadal lows. Going forward, while economic recovery is likely to be
weak, cooling of petrol prices and interest rates would support demand in
2013-14.

In the commercial vehicles (CVs) segment, freight demand and
transporter profitability play a key role in demand for new trucks. Over the
last two years, freight demand was affected by the slowdown in industrial
production, low infrastructure investment, and declining mining output.
Moreover, a sharp hike in diesel prices in September 2012, further
impacted the profitability of transporters, resulting in a sharp decline in
the demand for CVs. Going forward, while transporter profitability is
expected to remain under pressure, slight recovery in freight demand
(supported by improvement in industrial and agricultural output) and the
low base of last year's CV sales will aid marginal growth in CV volumes.




2

CRISIL CRB Customised Research Bulletin




The Indian two-wheeler industry has consistently grown at a high rate of
12 per cent over 2001-02 to 2011-12, making India the second-largest
market for two-wheelers in the world (next only to China). However, with
penetration in urban markets (at 120-130 two-wheelers per thousand
persons) and select states reaching saturation levels, there were
concerns about the continued sustainability of the high growth rates.
However, our state-wise analysis of the Indian two-wheeler industry
shows a wide gap in the current penetration level across the states,
indicating considerable untapped potential. Income growth and
improvement in road infrastructure in states with lower penetration will
support the two-wheeler industry's growth momentum.




Prasad Koparkar
Senior Director
Industry & Customised Research





3






Opinion
Less penetrated states hold key to two-wheeler industry's growth 01

Economic Overview - May 2013 03

Industry Overview
Two-wheeler 04
Commercial vehicles 06
Cars & utility vehicles 08
Auto component 10

Independent Equity Research Report
Hero MotoCorp Ltd 12

Customised Research Services
Automobiles 13

Media Coverage 14

Contents



CRISIL CRB Customised Research Bulletin
























































































1


India is poised to overtake China as the world's largest
two-wheeler market over the next 5 years. While growth
in the past was driven by relatively developed, more
urbanized states, future prospects of the market will be
increasingly driven by lesser saturated, developing
states. While over 60 per cent of urban households
currently own a two-wheeler, less than 20 per cent of
rural households own one. In relatively more developed
states, more than half of addressable households have
been covered. A faster growth in average incomes and
road infrastructure and accessibility will drive stronger
growth in two-wheeler demand in the underpenetrated
states. Hence CRISIL Research believes that a strong
presence in underpenetrated states will be crucial to the
two-wheeler industry's growth.

Income and infrastructure disparities reflect on
two-wheeler demand distribution
Region-wise demand distribution (2010-11)

Source: Industry, CRISIL Research

From a regional perspective, the Southern region leads
in terms of two-wheeler sales owing to higher income
levels (besides a higher share of mopeds). The Eastern
region lags far behind others in two-wheeler demand
despite a commensurate share of population (26 per
cent of total) owing to significantly lower income and
infrastructure penetration levels.







At the state level, the top five states (Maharashtra,
Tamil Nadu, Uttar Pradesh, Gujarat and Andhra
Pradesh) contributed over 50 per cent of total two-
wheeler sales. Except Uttar Pradesh, these top states
are all above average in terms of per capita GDP and
two-wheeler penetration. Hence, to better gauge
differences in demand potential across states, a
comparison of penetration levels, sales growth trends
and structural demand drivers is necessary.

Income crucial to two-wheeler sales growth but
isn't soIe driver.
In 2010-11, underpenetrated markets (represented on
the RHS of the graph below) cumulatively accounted for
about 40 per cent of total two-wheeler sales. Over
2006-07 to 2010-11, growth in these markets was also
the highest. The graph also indicates a positive
correlation between penetration and average nominal
income levels until incomes become high enough to
enable consumers to upgrade to cars.

Growth trend versus penetration levels across
major markets (2010-11)

Notes: 1. Penetrati on l evel s cal cul ated as summati on of 10 years' (2001-02 to
2010-11) total sal es di vi ded by esti mat ed popul ati on for 2010-11.
2. St ate fi gures for per capi ta GDP and penetrati on l evel s i ndexed to Al l -Indi a
val ues (100) and pl otted on LHS.
3. Abbrevi ati ons: TN = Tami l Nadu, HR = Haryana, GJ = Gujarat, KA =
Karnataka, GA= Goa, MH = Maharasht ra, KL = Keral a, UP = Uttar Pradesh, RJ
= Rajasthan, AP = Andhra Pradesh, MP = Madhya Pradesh, CH= Chatti sgarh,
OR=Ori ssa, PB = Punj ab, WB = West Bengal , BH = Bi har, JH= Jharkhand.
Source: CRISIL Research
North
28%
South
31%
East
13%
West
28%
62
60
0%
5%
10%
15%
20%
0
50
100
150
200
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Penetration levels (per 1000 persons)
Nominal PCGDP (Rs. '000s) (2004-05 base)
4 yr CAGR (2006-07 to 2010-11) (RHS)
9%CAGR
11%
CAGR
13%CAGR
Opinion
Less penetrated states hold key to two-
wheeIer industry's growth



2

CRISIL CRB Customised Research Bulletin
Our study shows that states with low but fast-growing
average income levels (including most Eastern states)
and higher sales growth of lower-priced consumer
durables (such as CRT televisions), recorded the
sharpest growth in two-wheeler sales over 2006-07 to
2010-11. On the other hand, states towards the
extreme left of the graph such as Tamil Nadu and
Punjab have already started showing lesser sensitivity
of two-wheeler penetration levels to incremental income
growth, whereas passenger car sales are on a sharp
uptrend.

...road connectivity is also crucial

Road development, spending patterns highly linked
to two-wheeler sales

Note: States have been sorted according to lowest to highest
two wheeler ownership in 2009-10. Growth in roads
constructed under PMGSY is charted on the left axis; growth
in discretionary spending and two-wheeler ownership on the
right axis.
Source: NSSO, Basic Road Statistics of India, and CRISIL
Research

Evidence of infrastructure development driving
ownership of durables in less-penetrated states is also
already visible. Better road connectivity in several
states (measured by growth in length of roads under the
Pradhan Mantri Gram Sadak Yojana - PMGSY) has
sharply driven up two-wheeler ownership during 2004-
05 to 2009-10 (see chart above). In Rajasthan, Bihar,
Orissa, and Uttar Pradesh, although overall ownership
of two-wheelers remains low as compared to more
developed states, ownership has more than doubled
between 2004-05 and 2009-10.

Right regional mix will be key to success in
Indian two-wheeler industry
The direct correlation between infrastructure
development, incomes, consumer durables' ownership
and two-wheeler penetration levels suggests that two-
wheeler penetration levels will improve sharply in some
of the lower-penetrated states as incomes and
infrastructure availability improves. They will especially
gain momentum once average household incomes
cross the ownership threshold for consumer durables.
While two-wheeler sales growth in developed states is
expected to remain constrained below 8-10 per cent
annually, sales in less-developed Eastern and Central
states is expected to grow faster at a 15 per cent CAGR
over the next 5 years as incomes grow rapidly from a
low base.

In conclusion, as overall two-wheeler sales slow to a 9-
11 per cent CAGR and competition intensifies, players'
success will depend on their ability to gain incremental
volumes in nascent regional markets. The right regional
mix of distribution network will hold the key to the future
growth of the Indian two-wheeler industry.

0.0
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Discretionary spending growth
Growth of PMGSY roads (LHS)
Growth in two-wheeler ownership


3

Indian Economy
Economic Overview - May 2013


Macroeconomic Indicators - Forecasts



High Threat Medium Threat
Trade Growth (%)
Interest rates (%)
Foreign inflow (US$ bn) Credit growth (%)
Inflation (%) Industrial production growth (%) Currency
Sectoral inflation (%)
-8
-4
0
4
8
12
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13
Mfg
40
45
50
55
60
Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
Avg Rs per US$
-20
-10
0
10
20
Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
Exports Imports
7
8
9
A
p
r
-
1
2
J
u
n
-
1
2
A
u
g
-
1
2
O
c
t
-
1
2
D
e
c
-
1
2
F
e
b
-
1
3
A
p
r
-
1
3
1 Yr 10 Yr
0
10
20
30
Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
Non-food credit growth
0
10
20
A
p
r
-
1
2
J
u
l
-
1
2
O
c
t
-
1
2
J
a
n
-
1
3
A
p
r
-
1
3
Primary
Fuel
Manufacturing
4
8
12
Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
WPI CPI-IW
-2
2
6
10
A
p
r
-
1
2
J
u
n
-
1
2
A
u
g
-
1
2
O
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t
-
1
2
D
e
c
-
1
2
F
e
b
-
1
3
A
p
r
-
1
3
FDI+(ECBs/FCCBs)
Net FII flows
2012-13A 2013-14 Rationale
Growth Agriculture 1.9* 3.5
Industry 3.1* 4.4
Services 6.6* 7.3
Total 5.0* 6.0
Inf lation WPI - Average 7.3 6.3
Demand pressures on prices are expected to remain weak due to slower than
anticipated pick-up in GDP growth.
Fiscal def icit as a % of GDP 5.2
#
5.1
Lower GDP growth to result in lower than budgeted tax revenues. We also expect
some shortf all on disinvestment and spectrum sale relative to budgeted levels.
Interest rate
10- year G-Sec
(year end)
8 7.7-7.8
Lower inf lation to keep upside to the yields in check. Further 25 bps reduction in repo
rate expected until March 2014 will lower the f loor f or G-sec yields.
Exchange
rate
Re/US $
(year end)
54.4 54.0
Relative interest rate dif f erential and increase in f oreign institutional investment limits to
attract enough inf lows to cover the current account def icit, and keep the currency
around current levels.
Note *CSO Provisional Estimates,# revised estimate, A: Actual
Source: Central Statistical Organisation, CRISIL Research
Weaker momentum in household demand, downward rigidity in lending rates, uncertain
global economic environment and persistent shortage in f uel supply to keep growth
low.



4

CRISIL CRB Customised Research Bulletin
Industry Overview

Two-wheeler

Improved income prospects to drive two-
wheeler sales in 2013-14
After a robust 2010-11, growth in total domestic two-
wheeler sales slowed to 14.1 per cent in 2011-12. In
2012-13, growth in domestic two-wheeler sales slowed
further to 2.9 per cent, as slow rise in incomes,
especially in rural areas, and high fuel prices impacted
consumer sentiment. Exports declined by 1 per cent y-
o-y over a 27 per cent growth in 2011-12, mainly due to
the drop in export incentives post the withdrawal of the
DEPB scheme, unfavourable policy actions in key Asian
markets and higher competition in African markets.

In 2013-14, growth is expected to recover modestly to
6-8 per cent on expectations of normal monsoons
aiding healthy rural incomes, recovery in urban incomes
and lower fuel prices. However, the growth will remain
in single digits. Over the long term, the under-
penetrated rural market will hold the key to the
industry's growth.

Scooters to retain growth leadership, rural
demand to drive motorcycle sales
Growth in motorcycle and moped sales is likely to
recover to 5-7 per cent in 2013-14, while scooters sales
growth will remain above-average at 11-13 per cent.
Expectations of normal monsoons and higher minimum
support prices (MSPs) are likely to boost growth in
domestic sales of motorcycles and mopeds y-o-y
across both segments while domestic sales of scooters
will be driven by higher urban incomes and new model
launches.









Growth in motorcycle sales is estimated to have slowed
down to 0.1 per cent in 2012-13, due to a muted rise in
rural incomes and weak consumer sentiment. Domestic
scooter sales growth decelerated to 14.2 per cent in
2012-13, following a rise of 25 per cent and 42 per cent
in 2011-12 and 2010-11, respectively. In recent years,
scooter sales have been driven by supply-side factors
such as capacity expansions and new model launches,
even as demand grew rapidly. Sales growth moderated
in 2012-13 as an increase in supply had catered to
most of the pent-up demand towards the end of 2011-
12 and poor urban consumer sentiment led to limited
growth in fresh bookings. Waiting periods on popular
models are now almost nil (after peaking at over 6
months in 2011-12).

Demand for mopeds mainly comes from quasi-
commercial use by farmers, small businessmen and
shopkeepers in rural and semi-urban areas. In recent
years, sales have also been driven by improvement in
supply; in order to widen its reach, TVS Motors, the only
manufacturer, has built new dealerships in the North.
The company has also introduced a 'Business on
Wheels' scheme, wherein buyers are given a usage
demo, which helps boost customer awareness and
sales. However, in 2012-13, growth in moped sales
slowed sharply to 1.5 per cent as rural incomes were
affected by a poor monsoon and kharif output.




5
Growth trends across segments

Note: E-Estimated
Source: SIAM, CRISIL Research

Exports growth to remain robust with new
launches by players
Two-wheeler exports grew by 27 per cent in 2011-12,
as volumes remained buoyant despite the
discontinuation of the DEPB scheme during the year.

In 2012-13, however, two-wheeler exports fell by 1 per
cent owing to the following reasons:
The withdrawal of the DEPB scheme and
subsequent reductions in incentives under the
Duty Drawback scheme (to 2 per cent effective
October 2012) forced players to hike prices across
markets. Since most of these are price-sensitive
segments (economy motorcycles account for over
50 per cent of total exports), the price hikes directly
impacted demand.
Unfavourable policy actions in some major markets
like Sri Lanka, wherein 100 per cent import duties
were imposed on two-wheelers.
Higher competition in African markets where
Honda Motorcycles (Japan) and a number of
Chinese manufacturers entered the market with
aggressively priced products.

In 2013-14, growth is expected to recover to 11-13 per
cent because of fewer policy-related disruptions and
new launches.
Quarterly trend in two-wheeler exports

Source: CRISIL Research





























-12
1
26
23
12
0
12
9
28
42
24
14
16
4
31
24
11
2
-15
-5
5
15
25
35
45
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 E
Motorcycles Scooters Mopeds
(per cent)
39%
27%
19%
3%
-10%
-1%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
100
200
300
400
500
600
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009-10 2010-11 2011-12 2012-13
Exports volumes (thousands) (LHS) Growth rate (y-o-y) (RHS)
DEPB
withdrawal



6

CRISIL CRB Customised Research Bulletin
Industry Overview

Commercial vehicles

CV sales volumes decline in 2012-13, to revive
in 2013-14 on higher GDP expectations
Key macroeconomic indicators such as IIP, rail freight
loading, mining, road awarding and execution, and
growth in port traffic remained weak during 2012-13,
thereby impacting CV sales. CV sales declined by 2 per
cent (y-o-y) in 2012-13, after growing by 28.5 per cent
and 18 per cent respectively in 2010-11 and 2011-12.

Sales of medium and heavy commercial vehicles
(MHCVs), which are directly linked to the level of
economic activity, declined by 25.9 per cent in 2012-13
following deceleration in GDP growth to 5.0 per cent.
Lower industrial and agricultural output, weak
transporter sentiments weighed down by increase in
fuel prices, high interest rates, inflation and higher
vehicle prices continued to impact MHCV sales. Other
factors that had a bearing on sales growth were
availability of finance, and subdued freight rates. In
contrast, LCV sales proved to be relatively resilient to
the slowdown in GDP growth, and grew at 15.9 per
cent.

Segment-wise short-term calls


Goods Vehicles

Weaker sentiments, lower GDP growth
dragged down MHCV sales in 2012-13
After recording a compounded annual growth rate
(CAGR) of 35.7 per cent in 2008-09 and 2009-10,



growth in MHCV sales had moderated to 8.8 per cent in
2011-12 following the slowdown in GDP growth. After
dipping to 3.9 per cent in 2011-12, industrial GDP
continued to slow down in 2012-13 precipitating a 25.9
per cent fall in MHCV sales in 2012-13. During the year,
the slowdown in GDP impacted freight availability and
rates, whereas the continuing rise in fuel costs and high
interest rates increased the cost of vehicle ownership,
thus affecting transporter sentiments.

The following section offers a snapshot on factors that
affected growth of the various MHCV segments in
2012-13.

Intermediate commercial vehicles (ICVs): In a
decelerating economy, ICV sales typically slacken a
while after the economy slows down, as movement of
goods from the primary warehouse to the local
distributor, for which these vehicles are used, slows
down with a time lag. Therefore, in 2012-13, ICV offtake
fell at a relatively slower pace as compared with the
other segments.

Medium commercial vehicles (MCVs): Similar to
ICVs, MCV sales volumes declined at a slower pace
than HCV sales in 2012-13. This is because
transporters typically limit purchases of higher tonnage
vehicles during phases of economic slowdown.

Multi-axle vehicles (MAVs): MAV sales declined
sharply in 2012-13 owing to the weakness in freight
rates (in spite of a diesel price hike), low freight
availability and weak transporter sentiments.

Tippers: In 2012-13, tipper sales declined sharply,
affected by the ban on illegal iron ore mining and a
2011-12 2012-13
Segments Growth (%) Growth (%)
MHCVs goods 8.8 (25.9)
LCV goods 30.2 15.9
Buses 6.5 (4.1)
Source: CRISIL Research


7
sharp slowdown in the awarding of road projects during
the year.

Tractor trailers: Tractor trailer sales declined sharply in
2012-13 owing to subdued industrial GDP growth and
slowdown in EXIM traffic.

Short-term volume growth


We expect MHCV sales to see a modest recovery in
2013-14 based on expectations of higher GDP growth.
Recovery in MHCV sales will, however, lag revival in
GDP growth. Fleet utilisation levels of transporters and
spot freight rates will have to improve before a recovery
is visible in MHCV sales.

LCV sales relatively less impacted by
economic slowdown
Light commercial vehicles (LCVs) grew by 15.9 per cent
in 2012-13 enabled by a 21 per cent increase in the
sales of small commercial vehicle (SCVs; comprising
sub-one tonne vehicles and pick-ups). Growth in the
SCV segment was led by a sharp growth in the pick-up
segment and a corresponding moderation in growth in
the sub-one tonne category in 2012-13. The sub-one
tonne segment declined following a shift in demand
from the mini truck (0.75 tonne payload category) to the
small pick-up category (about 1.25 tonne payload
capacity) because of aggressive marketing and
financing initiatives undertaken by the OEMs for pick-
ups. Sales of higher tonnage LCVs fell by 22.7 per cent
in 2012-13 with slowdown in freight demand, and the
shift in preference for SCV and ICVs.

Goods three-wheeler offtake is estimated to have
declined by 9 per cent in 2012-13. However, in 2013-
14, three-wheeler sales is expected to show a modest
recovery led by a consumption-led revival in GDP.

Small trucks continue to spur LCV sales
Small commercial vehicles (SCVs), comprising mini-
trucks (less than 1 tonne payload) and pick-ups, will
remain the fastest growing category in the light
commercial vehicles (LCVs) segment. Led by player
initiatives, pick-ups will continue to outrun sub-one
tonne sales in the near term. Sales of LCVs is expected
to grow by 10-12 per cent in 2013-14. While mini-trucks
have almost entirely replaced the use of large three-
wheelers, sales of micro-trucks (an emerging class of
SCVs, with the 0.5-0.6 tonne payload pitted against the
smaller three-wheelers) will drive sales growth.

Passenger Vehicles

Bus sales growth fell in 2012-13
Bus sales declined by 4 per cent in 2012-13, owing to
slowdown in demand from State Transport
Undertakings (STUs) and cautious approach
undertaken by private operators towards new
investments. Demand from private operators,
particularly contract operators plying buses for school
and corporate segments, has been affected by the
slowdown in the service sector (especially the IT/ITeS
sector) and the inability of these operators to pass on
the continuous increase in fuel cost. A revival in sales
is, however, likely in 2013-14, with the expected
improvement in demand from contract operators,
following a recovery in the services sector, as well as
from STUs.


GVW 2011-12 2012-13
Segments (tonnes)
Growth
(%)
Growth
(%)
MHCV goods segment:
- ICVs 7.5 - 12.0 21.1 (14.4)
- MCVs 12.0 - 16.2 (11.1) (17.8)
- MAVs > 16.2 (1.2) (36.4)
- Tippers >12.5 42.0 (23.0)
- Tractor Trailers > 16.2 (1.9) (30.9)
Domestic MHCVs goods segment 8.8 (25.9)
ICV: Intermediate commercial vehicle; MCV: Medium commercial vehicle;
MAV: Multi-axle vehicle; P: Projected
Source: CRISIL Research, SIAM



8

CRISIL CRB Customised Research Bulletin
Industry Overview

Cars & utility vehicles


PV sales grew at sub-5 per cent levels for
second consecutive year
Domestic sales of cars and utility vehicles (UVs) grew
by merely 2 per cent in 2012-13 despite a low base in
2011-12. Domestic car sales, which had increased by 3
per cent in 2011-12, declined by 7 per cent in 2012-13.
Growth was impacted due to weak macroeconomic
growth, uncertainty over income growth, increasing
petrol prices, high interest rates and lower disposable
income caused by high inflation. Additionally, a lockout
at market leader Maruti Suzuki India Ltd's (MSIL)
Manesar production facility, and the consequent
disruption in production, impacted growth marginally.

On the other hand, domestic utility vehicles (UVs),
including vans, grew by 32 per cent during 2012-13
because of new model launches during the year and
also due to increased preference for diesel vehicles.

Domestic car and UV sales to recover slowly in
2013-14
CRISIL Research expects passenger vehicle sales to
grow by 5-7 per cent in 2013-14 over a 2 per cent
growth in 2012-13. Macroeconomic recovery and
decline in petrol prices would aid a revival in small car
sales. We expect utility vehicle sales to continue to
grow, led by new model launches. However, growth will
be capped at 9-11 per cent on account of diesel price
hikes. Long-term growth prospects will remain healthy
until 2017-18, as passenger vehicle penetration is
currently at low levels.









Key forecast for the cars and utility vehicle
segment


Exports stage a recovery in 2012-13
Exports of cars & utility vehicles (UVs) grew by 9 per
cent in 2012-13 after a marginal decline of 0.4 per cent
in 2011-12. Weak global demand, especially in Europe,
one of the largest export markets, had impacted
demand in 2011-12. In 2012-13, sluggish demand in
Europe and increase in import and excise duty rates in
Sri Lanka, which accounts for nearly 5 per cent of the
total exports of players like MSIL, restricted growth to
single digits.

Export sales and growth trend

Source: CRISIL Research

2011-12 2012-13
Growth (%) Growth (%)
Domestic Passenger vehicle
demand
5% 2%
-- Cars 3% -7%
- Small Cars -1% -10%
- Sedans 20% 3%
-Utility vehicles and Vans 13% 32%
Export demand 14% 9%
Source: SIAM, CRISIL Research
9%
55%
33%
-0.39%
14%
9%
-10%
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Thousands
PV exports (units) LHS PV exports growth (%) RHS


9
Hyundai Motors India Ltd (HMIL), the largest exporter
from India, clocked 9 per cent growth in exports during
2012-13, with its i10 and i20 models performing well.
HMIL supplies to over 100 destinations across West
Asia, Asia Pacific and the European region. MSIL, the
second largest exporter from India, exports its cars to
Europe, Algeria, Chile, Sri Lanka and Nepal. Export
sales of MSIL declined by 5 per cent in 2012-13 due to
slower growth and increasing competition in the export
markets as well as higher import and excise duty rates
on vehicle imports in Sri Lanka.

In 2012-13, Honda started exporting Brio to South
Africa, while Renault started exporting Duster to South
Africa. Also, Volkswagen started exporting Polo and
Vento to the Middle East and Africa, adding to its
existing destinations in the Middle East and South
Africa. M&M started exporting its SUV, XuV 5oo to
Europe apart from its existing market, South Africa.

Market share of HMIL remained steady at 47 per cent,
while that of MSIL and Nissan fell with a decline in their
exports during the year. However, the share of other
players increased due to growth in the sales of Honda,
Volkswagen, Toyota, M&M and Ford.

Models launched in 2012-13 to aid growth
Several new models were launched in 2012-13,
especially in the UV segment, boosting its growth.
These model launches, along with the new l launches
expected in 2013-14, will continue to drive growth in UV
sales.

Additionally, within the sedan segment, the super
compact segment is expected to see increasing OEM
action, with players such as M&M, Tata, Maruti and
Honda launching their models. Sub-4m variants of
existing models are expected to be launched in 2013-14
as players seek to take advantage of the excise duty
benefit on such cars.
Model launches in 2012-13






2012-13 E
Small Cars
Renault Pulse,
GM Sail UVA
Sedans
Renault Scala,
GM Sail sedan
UV
Maruti Suzuki Ertiga,
Renault Duster,
M&M Quanto,
Nissan Evalia
Note: E-Estimated
Source: CRISIL Research



10

CRISIL CRB Customised Research Bulletin
Industry Overview

Auto component

Production growth slowed to historical lows in
2012-13
After rising by about 30 per cent in 2009-10 and 2010-
11, auto component production growth slowed down
gradually, dropping to 13 per cent in 2011-12. In 2012-
13, the sector's revenue growth decelerated sharply to
a 5-year low of 2-4 per cent (last seen in 2008-09).
Lackluster demand from automobile OEMs (which
account for 70 per cent of auto component demand)
pulled down growth. Growth in exports is also estimated
to have slowed to 0-3 per cent y-o-y in 2012-13 on a
high base (41 per cent in 2011-12) and also due to
lower demand from key markets.

CRISIL Research expects production of auto
components to grow by 6-8 per cent y-o-y in 2013-14. A
gradual improvement in OEM demand would drive
recovery. Growth in exports is also likely to improve, but
continued sluggishness in the EU and US will act as
deterrents. Long-term growth prospects for the industry
remain healthy, driven by domestic and global OEM
demand. Growth in demand from OEMs is expected to
improve 6-8 per cent in 2013-14, on a low base, led by
a pick-up in production of commercial vehicles and cars
& UVs. Replacement demand is expected to grow by 9-
11 per cent y-o-y in 2013-14; as the value of existing
vehicles continues to rise. However, higher imports
would restrict growth in domestic production for the
replacement segment to 6-8 per cent y-o-y in 2013-14.

OEM slowdown pulled down growth to 5-year
low in 2012-13
The auto component industry's revenue growth is
estimated to have decelerated sharply to 2-4 per cent in
2012-13 from 32 per cent in 2010-11. Growth in OEM
demand (70 per cent of total) slowed significantly to 1-3


per cent in 2012-13, as production of medium & heavy
commercial vehicles, small cars, tractors and two-

wheelers declined. Growth in replacement demand is
estimated to have remained stable at 9-11 per cent.

Capital expenditure plans on hold as utilisation
levels remain capped
The auto component industry's asset turnover levels,
which crossed their 5-year averages in 2010-11, rose
further in 2011-12, as capacity expansions were limited
amid a healthy growth in demand (implying high
utilisation rates). However, in 2012-13, the industry's
asset turnover levels are estimated to have dropped
sharply, in line with a 10-15 per cent drop in average
utilisation rates of Tier-1 component makers.

GFA addition by leading companies to fall to
historical lows

Note: E-Estimated
Source: CRISIL Research

Sluggish global markets to restrict export
growth
Auto component exports are expected to grow in 2013-
14, albeit at a lower rate as compared to the historical
levels of 15-17 per cent, as vehicle sales in the EU are
36
43
37
32
36
27
1.57
1.33
1.29
1.55
1.64
1.56
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
0
5
10
15
20
25
30
35
40
45
50
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 E
Investments (leading 73 cos) (LHS) GFA turnover (times) (RHS)
(Rs. bn)


11
likely to decline for the fourth consecutive year due to a
fall in sales of both passenger and commercial vehicles.
In the US too, growth in sales of cars and light trucks is
likely to slow down from 10 per cent over the past 2
years. Sales growth of heavy trucks is also expected to
remain muted, after expanding by over 60 per cent
between 2010 and 2012. Thus, growth would be mostly
driven by better penetration of Indian exporters across
major markets and continuing growth in US OEMs'
production levels.

Growth in quarterly export incomes

Note: Our set includes Bharat Forge, Ramkrishna Forgings,
Rico Auto and Sona Koyo Steering Systems.
Source: CRISIL Research, Prowess

Further, over 60 per cent of India's total auto
component exports are to Europe and the North
American Free Trade Agreement (NAFTA) region,
which offer significantly higher realisations than
domestic sales. The share of developed markets within
the overall exports pie has increased over 2006 to
2011, with the share of EU and NAFTA regions having
augmented by 5 per cent. This increase in share has
largely been driven by a significant growth in exports of
engine parts (over 30 per cent of EU and US exports in
2011). This again highlights the improving technological
capabilities of Indian players and quality specifications
of Indian products along with greater impetus on LCC
sourcing by global OEMs, especially in the wake of the
financial crisis and sluggish demand.

India: Auto component export destinations (2011)

Source: CRISIL Research, UN Comtrade


















31 32
16
-42
-47 -50
138
78
48 47
24 28
-24
-100
-50
0
50
100
150
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008-09 2009-10 2010-11 2011-12 2012-13
Growth (%) export income for set of 4 companies
(per cent)
EU27,
33%
North
America,
26%
SE Asia,
13%
MENA,
11%
Latin
America,
4%
Others,
13%



12

CRISIL CRB Customised Research Bulletin













Hero MotoCorp's Q4FY13 earnings were in line with CRSL Research's
expectations. Revenues declined 1.3% q-o-q to 61 bn due to weak demand-
led 3% decline in volumes. However, revenue decline was arrested by
realisation growth of 1.7% q-o-q (led by higher contribution from scooters).
PAT grew 17.7% q-o-q to 5.7 bn. Hero MotoCorp's brand-building efforts post
the Honda split, capex and intensifying competition will exert pressure on its
PAT in the short term. However, we believe its fundamentals are intact given
its leadership position, robust rural reach and brand recall. We maintain the
fundamental grade of 5/5..
Two-wheeler volumes declined sequentially on weak demand
Hero MotoCorp's volumes fell 3% q-o-q (compared to the industry's 4.5%
decline) to 1.53 mn two-wheelers in Q4 due to muted demand. Despite weak
demand and intensifying competition, Hero MotoCorp's market share in two-
wheelers rose by 60 bps q-o-q to 39.2%. It also gained share in its core
domestic motorcycle segment share up by 210 bps q-o-q to 54%. However,
the company lost share in two-wheelers from 40.5% in FY12 to 38.5% in FY13
owing to stiff competition largely from Honda.
EBIT margin improved on lower raw material costs
EBIT margin rose by 150 bps q-o-q to 9.5% due to lower raw material costs.
Raw material costs declined by 143 bps to 73.1% due to (i) softening of prices
of key raw materials aluminium and steel and (ii) benefit of yen depreciation
on imports (~10% indirect imports, half of which is yen-denominated).
Recently announced price hike
Despite stiff competition, Hero MotoCorp has hiked prices from 500 to 1,500
per vehicle on account of higher logistic costs. On the other hand, Honda is offering
competitive prices - it has launched 'Dream Yuga' at a lower price of 43,000
in the executive motorcycle segment.
Inventory pile-up continues at the dealer level on poor demand
Hero MotoCorp's inventory in books reduced from 13 days in FY12 to 11 days
in FY13. However, our dealer interactions indicate that inventory at the dealer
level remains high at over four weeks owing to weak demand and closing-year
sales push. This indicates that wholesale dispatches outstripped retail sales
and can pressurise growth going ahead.
Earnings estimates revised downwards
We have lowered our PAT estimate for FY14 and FY15 by 9.2% and 6.5%,
respectively as (i) we lower volume growth estimates for FY14 and FY15 to
7.2% and 8.4%, respectively, on weak demand and (ii) we expect EBIT margin
to decline by 60 bps each in FY14 and FY15 on account of stiff competition
which compels the company to offer freebies.
Fair value reduced to t1,684 from 1,842 per share
We have lowered DCF based fair value to 1,684 from 1,842 following a
downward revision in our earnings estimates. At the current market price of 1,618,
the valuation grade is 3/5



KEY FORECAST
(t mn) FY11 FY12 FY13# FY14E FY15E
Operating income 197,302 238,789 237,681 260,872 291,780
EBITDA 26,386 36,330 32,845 35,827 40,054
Adj Net income 20,084 23,788 21,182 21,689 28,053
Adj EPS () 100.6 119.1 106.1 108.6 140.5
EPS growth (%) -10.1 18.4 -11.0 2.4 29.3
Dividend Yield (%) 7.5 3.2 4.3 3.4 4.2
RoCE (%) 68.6 69.5 45.9 45.0 49.0
RoE (%) 62.6 65.7 45.6 39.1 41.1
PE (x) 16.1 13.6 15.3 14.9 11.5
P/BV (x) 10.9 7.5 6.5 5.3 4.3
EV/EBITDA (x) 10.5 8.0 8.9 8.1 6.9
NM: Not meaningf ul; CMP:Current market price;# Based on abridged f inancials
Source: Company, CRISIL Research Estimates
CFV matrix






Shareholding pattern



Performance vis--vis market


1 2 3 4 5
1
2
3
4
5
Valuation Grade
F
u
n
d
a
m
e
n
t
a
l

G
r
a
d
e
Poor
Fundamentals
Excellent
Fundamentals
S
t
r
o
n
g
D
o
w
n
s
i
d
e
S
t
r
o
n
g
U
p
s
i
d
e
Key stock statistics
NIFTY/SENSEX 5999/19735
NSE/BSE ticker HEROMOTOCO
Face value ( per share) 2
Shares outstanding (mn) 199.7
Market cap ( mn)/(US$ mn) 323,115/5,965
Enterprise value ( mn)/(US$ mn) 322,347/5,951
52-week range ()/(H/L) 2,279/1,435
Beta 0.7
Free float (%) 47.8%
Avg daily volumes (30-days) 454,629
Avg daily value (30-days) ( mn) 681.9
52.2% 52.2% 52.2% 52.2%
33.2% 32.3% 32.0% 30.6%
5.9% 6.7% 7.1% 8.5%
8.7% 8.8% 8.7% 8.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jun-12 Sep-12 Dec-12 Mar-13
Promoter FII DII Others
1-m 3-m 6-m 12-m
Hero
MotoCorp
8% -11% -17% -28%
NIFTY 4% 0% 6% 15%
Returns
Independent Equity Research Report
Hero MotoCorp Ltd
May 02, 2013


13





























Customised Research Services Automobiles
Coverage
Key Offerings

Forecasting
Automobile forecasting/statistical tool development services
Short term demand and supply forecasts based on econometric models
Medium-to-long term demand and supply forecasts model for strategic planning activities
Market entry strategy and business planning support
Market assessment and outlook of auto components and tyre business in India
Demand potential for alternative fuel vehicles
Commodity prices for key raw materials like metals, rubber and polymer

Market dynamics
Market size, characteristics, structure, dynamics and profitability of the used vehicle segments
Competitive benchmarking studies based on:
Product portfolio, distribution network and marketing strategies for new and existing products
Supply chain and sourcing strategy of OEMs
Financial parameters, growth trends, export potential etc of industries/companies
Cost-structure and operational efficiency of an OEM vis--vis other OEMs
Impact analysis of developments concerning auto fuels, economic indicators and raw material prices

Financing options
Benchmarking of independent auto financiers with their competitors
Financial assessment of vendors



14

CRISIL CRB Customised Research Bulletin















































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