Market expects auto volumes to recover in FY16

Passenger cars and commercial vehicles growth to outpace two-wheeler growth

The automobile sector has seen a prolonged slowdown. Though slowing growth, high interest rates and high fuel prices have taken the wind out of the ‘sunrise sector’, 2015-16 is expected to be a different story; all triggers are in place for a strong revival in volumes. Though revenues in the December quarter were nothing to write home about (blended revenue growth of nine per cent year-on-year), the Street continues to be overweight on the sector, owing to falling fuel prices and interest rates.

The quarter saw strong growth in the commercial vehicles (CV) segment, which pushed up revenue growth in the entire sector. Two-wheelers, tractors and tyre makers saw muted growth during the quarter, compared to the year-ago period. Analysts say the triggers are in place for strong volume growth in the coming years. The trend of the past 15 years suggests if GDP (gross domestic product) growth rises to seven per cent again and inflation is restricted to five per cent, the sector could see high double-digit volume growth. Emkay Global expects the two-wheeler sector to grow 13-14 per cent, passenger vehicles 14-16 per cent and medium & heavy commercial vehicles 27 per cent and 23 per cent, respectively, in FY16/17.

Tata Motors and Maruti Suzuki are well placed to capitalise on the revival, as these have required product pipelines to gain market share. While Maruti is expected to increase market share in the medium term, as it tends to during times of falling fuel prices (with its entry level cars), Tata Motors will see valuations rise once CVs start doing well in India.

The market is slightly cautious on the two-wheeler front. The two-wheeler segment has clocked growth of 10 per cent so far this financial year, well below the 15 per cent growth clocked in the first six months of FY15. The deceleration in two-wheelers have been driven by motorcycles, which is why some analysts are cutting volume growth expectations for FY16 and FY17. Deutsche Bank Markets Research estimates an uptick in two-wheeler volumes during FY15-17 (12 per cent a year), which should be driven primarily by scooters (18 per cent), as motorcycle growth (9.5 per cent) is likely to lag. High-end motorcycles more than 250 cc) will be the exception; and Deutsche Bank expects this segment to grow 40 per cent a year. Most analysts are betting on Eicher Motors, as the Royal Enfield franchise is expected to grow ahead of industry for several years.