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Auto Industry - Speed Breakers Ahead

| 9/27/2010 3:08 PM Monday

The Indian auto sector is firing from all cylinders and month after month auto companies are reporting record sales figures. For example, in the month of August 2010 total vehicles sold in the country was at 12.63 lakh units, the highest-ever achieved in a month in the history of Indian automobile industry. What is encouraging is that this feat is achieved after record sales posted in July this year when total sales was 12,37,461 units.

The growth is so robust that it has surpassed the SIAM (Society of Indian Automobile Manufacturers) estimates by a huge margin. SIAM, which forecasted passenger vehicles sales to grow around 13 per cent this fiscal is now witnessing a growth of around 30 per cent, whereas commercial vehicles segment is also growing at 24 per cent as against a forecast of 19-20 per cent.  R C Bhargava, Chairman, Maruti Suzuki, when asked how he foresees this growth going forward, explained thus: “High GDP growth rate of 8.5 per cent this fiscal and Government of India’s forecast of 9 per cent next fiscal will help the entire automobile sector to grow going forward”. Vijay Kedia, Director, Atul Auto agrees and says, “There is no reason to believe that this demand will not last.

This should continue till the end of FY11 and beyond for the simple matter that demand is still outstripping the supply. ”India was the place to be for global auto companies since early 2000 as demographics were improving (which means that with younger population per capita average disposable income was increasing bringing down the affordability barrier) accompanied by growth in road infrastructure and favourable government policies. Add to that the lower penetration of vehicles per 1,000 persons, the potential for massive growth becomes evident. True to this expectation, Indian auto industry, which was expected to become seventh largest vehicle producing country in the world by 2016, has already achieved the milestone six years ahead of the target.

Such outperformance did not go unnoticed by the stock market and BSE Auto index remains one of the best performing indices. In the year till date, BSE Auto index has risen by 22 per cent while the broader market index has given a return of 11 per cent during the same period. Even if we take last one year’s figures, we find that BSE Auto has moved up by 51 per cent as compared to just 18 per cent rise in BSE Sensex. So far, so good, but now the question is whether the auto sector still has any steam left and whether it will continue to outperform or whether it will moderate in the coming quarters as the industry might face some headwinds on account of shortage in components, rising commodity prices and tightening of interest rates.

 

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