Auto Expo Institutional Equities. Event Update. 12 February K. N. Sreenivasan

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Jesse Rice
5 years ago
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1 Event Update Auto Expo February 2014 We visited the Auto Expo 2014 held in Delhi recently. Following are the key takeaways: Lot of action in scooters, high-end motorcycles and compact hatchback/sedan cars: Unlike Auto Expo 2013, which witnessed much action on the sport utility vehicle(suv) and multi-utility vehicle (MUV) fronts, Auto Expo 2014 saw a slew of model launches by many manufacturers in scooter, high-end motorcycle and compact (A/B/C category) hatchback and sedan car segments. Consequently, heightened competitive intensity in the above three original equipment manufacturer (OEM) sub-segments is the immediate fallout. The flip side is that these sub-segments are likely to witness higher growth in the coming quarters. In sharp contrast, OEM segments like lower-end motorcycle, commercial vehicle and SUV/ MUV witnessed very few new product launches this time. Therefore, there is no significant change in either competitive equation or competitive intensity in these OEM sub-segments. The only SUV/MUV launch worth mentioning is Honda Cars India s Mobilio, a new model that is perfectly positioned between Toyota Kirloskar India s Innova and Maruti Suzuki India s (MSIL) Ertiga. In fact, Mobilio is a reflection of the new theme that we noticed at Auto Expo 2014, where manufacturers are attempting to do further granular positioning of new models by wedging them between two existing model sub-categories. The same theme was extended by MSIL as well, when it launched Celerio hatchback, wedged perfectly between WagonR and Swift. So, as the Indian automobile OEM juggernaut rolls forward, we should see a complex inter-play of two broad themes; firstly, creation of totally new product categories and secondly, the granular sub-division of existing product categories. Scooters: Barring Bajaj Auto (BAL), which is a conspicuous absentee in the scooter space, every two-wheeler manufacturer had new models in the scooter space. The star of the show in scooters was undoubtedly Hero MotoCorp, which had four new models/ prototypes on display -110cc Dash, Leap hybrid, stylish 125cc Dare, and the fat and muscular 150cc Zir. Of these, the only model which will hit the market immediately is 110cc Dash. Dare and Zir, both of which should have good sales potential, are expected to have staggered launch schedules in 2015/2016, respectively. The other interesting and commercially quite relevant launches were that of 125cc Activa from Honda Motors and Scooters India (HMSI), 110cc Zest from TVS Motor Company, and 110cc Let s from Suzuki India. We see decent revenue potential for all these models. Now, the bigger question is given the heightened competitive intensity, will the players make money? Our take is that while margins will come under pressure (rising marketing expenditure), growth in the scooter category should accelerate. The way the various OEM players are targeting the scooter category, don t be surprised if this OEM sub-segment eventually comes to occupy a 35%-40% share (23.9% for 9MFY14) of the overall Indian two-wheeler volume. High-end motorcycles: The maiden entry of Triumph and Harley Davidson, with their slew of models in the leisure motorcycle segment, stole the thunder. While Harley s Street 750cc entry-level bike grabbed much attention with its Rs410,000 price tag, the other stand-out model was Triumph s entry-level Bonneville (priced at around Rs550,000). While BAL displayed its over 300cc new Pulsar variants, and Hero MotoCorp also had several of over its 250cc new motorcycle concepts/prototypes on display, their noises were all drowned out by the offerings from Triumph and Harley Davidson. Royal Enfield from Eicher Motors was a conspicuous absentee at the Auto Expo It looks like the Indian leisure motorcycle sub-segment is poised to witness heady growth in the coming days, as new players like Triumph and Harley Davidson attempt to expand this market big time. K. N. Sreenivasan kn.sreenivasan@nirmalbang.com Please refer to the disclaimer towards the end of the document.

2 Compact hatchbacks and sedans: We witnessed fairly big-ticket action by passenger car players in the compact hatchback/sedan segments. The most conspicuous launch was that of Celerio hatchback from MSIL, replacing AStar. Perfectly sandwiched between WagonR and Swift, Celerio comes with the option of automatic manual transmission (AMT), a feature which, we believe, will appeal to many city commuters. In the lowerend compact-car segment, Nissan Datsun was conspicuous with its GO brand cars, all priced extremely competitively (in the around Rs350,000-Rs375,000 band), so as to gain a foothold in the space dominated by MSIL s entry-level cars. In the B segment premium hatchback space, we witnessed increased competition. After a gap of almost four years, Tata Motor s Bolt hatchback is a big-time cosmetic uplift on its earlier Vista, which looks outdated. Bolt is certainly not a new platform, but looks quite stylish and comes across as a breath of fresh air. Tata Motors is offering the option of the new 1.2 litre Revotron engine in Bolt. The other noteworthy launch in the B segment hatchback space is the new Jazz from Honda Cars India, essentially an upgraded version of its earlier Jazz model. We see rising competitive intensity in the compact sedan car space. Tata Motor s Zest is a more aerodynamic and stylish reinterpretation of its existing Manza platform. Again, like its Bolt hatchback, Zest comes with the option of a new 1.2 litre Revotron engine. However, please note that Zest is not based on a new platform. The likely launch of Zest is in 2HCY14. Xcent from Hyundai Motors is essentially a sub-four metre sedan version of its highly successful Grand i10, and the likely launch is by April Ford India s Figo sub-four metre sedan concept, we hear, could also go under production soon. Net-net, all this means rising competition in the compact sedan car space, where the market leader currently is DZire. Impact analysis player-wise (listed companies) MSIL: Positively impacted by Celerio, we expect the AMT version priced in the Rs430,000-Rs460,000 range (depending on the variant) to be a big hit in cities. The SX4 cross-over could also witness meaningful buyer traction. We expect Ertiga to be negatively impacted by Honda Cars India s Mobilio. Tata Motors & JLR: Zest and Bolt models, we believe, may at best arrest the further decline of Tata Motors in the hatchback and compact sedan segments. For a genuine fast-paced sales recovery, the company needs solid new platforms; but certainly, Zest and Bolt could provide near-term relief We do not see any significant change in competitive equations or competitive intensity for the company in the commercial vehicle or CV space, because of launches by rivals. We expect significant sales potential for the newly launched Jaguar F type fixed head coupe. This is probably the only Jaguar sports car that can take Porsche 911 head on. We also expect excellent sales potential for Jaguar C-X17 cross-over, which is the first cross-over from this company in its entire 91-year history. Eicher Motors: We do not expect any negative impact for its Royal Enfield leisure motorcycle brand, even though a few potential Enfield Continental GT (priced at Rs220,000) customers could switch over to Harley Street 750 (priced at Rs410,000). We believe players like Triumph and Harley Davidson will expand the Indian leisure motorcycle market, and Eicher Motors will be a beneficiary of this. We see Royal Enfield continuing to dominate the mass-market end of Indian leisure motorcycle market. There will be no negative or positive impact on Eicher-Volvo CV business because of products launched by rivals. Bajaj Auto: The company s stall revolved almost entirely around its RE60 quadricycle. We expect decent sales potential for RE60, which is essentially a well-appointed auto-rickshaw with a fourth wheel added. We expect RE60 quadricycle to be a great economic value proposition for actual users Its stylish U-car was the cynosure of all eyes at the stall, yet we don t see any significant commercial potential for this in India. While the company s razor-sharp focus on motorcycles and on competitive cost structure is commendable, we think it is probably missing out on big domestic growth in scooters. But may be Managing Director Rajiv Bajaj also has a very valid logic and perspective, when he vehemently defends his company s single-minded and razorsharp focus on motorcycles at the cost of scooters, and also on keeping the cost structure lean. As they say, one swallow does not maketh a summer. It may be grossly unwise to prematurely conclude that Bajaj Auto s staying from scooters is a flawed approach, just because the company s motorcycle sales, both at the export and domestic fronts, hit a dull patch. Investors should still extend the benefit of doubt to Bajaj Auto, as the long-term logic of staying focused exclusively on motorcycles should get validated, once the company s motorcycle exports recover and growth gets fast-tracked. 2 Auto Expo 2014

3 Bajaj Auto displayed its over 300cc Pulsar motorcycle variants; but we were disappointed that there were no new launches in the relevant 150cc Pulsar category. Net-net, we felt Bajaj Auto s stall reflected the current mood of the company, wherein it is conserving all its ammunition for a future date and better times. We feel Bajaj Auto is waiting for a broader export and domestic two-wheeler market recovery, as there have been no new meaningful launches from the company in the highvolume sub-segments of the motorcycle market. Hero MotoCorp: The company s stall clearly demonstrated the management s resolve to address the matter of life after Honda. We see Hero MotoCorp s competitive position improving in scooters. In mass-market motorcycles, we don t see any incremental negative impact for the company because of launches by rivals. Hero MotoCorp s stall, we felt, witnessed the maximum footfalls. Ashok Leyland: Its Boss intermediate commercial vehicle (ICV) was the star of its show. Ashok Leyland is not witnessing any significant change in competitive intensity in its key product segments. Mahindra & Mahindra (M&M): The company s stall had products from multiple OEM categories SUV, truck, bus, scooter, motorcycle, etc. M&M unveiled the automatic transmission variant of its already existing Quanto UV. It also showcased the Ssangyong Rodius UV. We broadly see a status quo, as far as M&M s competitive equation (vis-a-vis other players) and intensity are concerned. TVS Motor Company: We expect some improvement for the company because of new scooter models like Zest and Jupiter. A quick word on the broader theme at Auto Expo 2014 As already stated, the common theme at Auto Expo 2014 was the attempt made by various OEM players to either: a) Create a new product category/ model by crossing two entirely different product categories (e.g. cars and UVs), orb) Alternatively, go for further granular division of existing sub-categories that are already there within a product category. Specific examples of the above themes are:- 1) MSIL s SX4 crossover called S-Cross, is a cross between the C segment SX4 car and a SUV (falls under Theme a ) 2) Jaguar s C-X17 cross-over is also a premium car/ SUV cross-over, modeled on the lines of Theme a. 3) MSIL s Celerio and Honda India s Mobilio fall under Theme b. As the Indian OEM juggernaut rolls forward, we expect many more vehicle launches from OEMs on the above lines. These product development themes happen when OEMs start hitting a ceiling as far as expanding their tally of genuine new product categories. While automobile purists may not entirely be happy with cross-overs, the reality is that discerning auto customers are increasingly keen on such models. Why else would a premium brand like Jaguar make a major deviation from its 91-year-old history and come up with the C-X17 cross-over? If Germany s Porsche could deviate from Porsche 911 and also start making Panamera, then Jaguar can as well come up with the C-X17 cross-over. What else did Auto Expo 2014 showcase? Auto Expo 2014 showed the full resolve of European luxury/ premium brands like Audi. Mercedes Benz, BMW, Volkswagen and JLR, to nurture and properly position their premium brands in India. The big-ticket presence of these brands, with a slew of new models, only goes to indicate the solid long-term automobile demand growth potential in India. These long-haul European OEMs just do not seem to share the doom and gloom environment that seems to have enveloped India at large. Not to forget that these great names have seen and witnessed multiple and long-lasting automobile demand cycles in many parts of the world. To cite an example, when Volkswagen entered the Chinese market in 1984 through two separate passenger car JVs with FAW and SAIC, the Chinese car market was quite small and Volkswagen just a bit player there. Fast-forward by three decades, and today China is the globe s largest automobile market (since 2009 rather) and has pierced the 20mn mark in 2013 for the first time. And not to forget, Volkswagen is now at the top of the Chinese passenger car heap, with a ~21% market share, having overtaken General Motors. To many of these solid European vehicle brands, India is the last frontier of growth. Notwithstanding their adverse European high cost structures, they are ready to seed their brands and spend a few decades slugging it out in the heat and dust of the Indian competitive arena before they emerge as serious top-flight automobile OEM players. It is only we Indians who do not seem to share their long-term optimism on India s automobile demand potential. 3 Auto Expo 2014

4 Photos Jaguar s C-X17 cross-over MSIL s SX4 cross-over MSIL s Celerio Datsun s GO Renault s Zoe compact car Tata Motor s Bolt premium hatchback Hyundai s Xcent compact sedan Ford s Figo compact sedan concept 4 Auto Expo 2014

5 Tata Motors Zest compact sedan Jaguar s F type coupe BAL s RE60 quadricycle BAL s U-car concept Hero MotoCorp s Zir scooter Harley Davidson s leisure bike Harley Davidson s Street 750 motorcycle HMSI s Activa 125cc scooter 5 Auto Expo 2014

6 TVS Motor s 110c c Zest scooter Suzuki India s 110cc Let s scooter Hero MotoCorp s Dash scooter Triumph s Bonneville leisure bike Hero MotoCorp s Dare scooter Hero MotoCorp s 250cc motorcycle prototype 6 Auto Expo 2014

7 Disclaimer Stock Ratings Absolute Returns BUY > 15% HOLD 0-15% SELL < 0% This report is published by Nirmal Bang s Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Access our reports on Bloomberg Type NBIE <GO> Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Hemindra Hazari Head of Research hemindra.hazari@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai Board No. : /1 Fax. : Auto Expo 2014

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