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Automobile Sector - an update

Automobile Sector.

Free-riding on high price elasticity coming to an end. A 24% reduction in vehicle prices, in the form of lower excise duties has played a significant role in the 15% volume CAGR since 2003. Nonetheless the gravy train may come to a stop, putting the onus on higher income levels to drive affordability and thereby volumes from here on. Separately on competition, we believe the size of the Indian auto market would need to be bigger before it becomes more cutthroat. Devoid of further price reductions, could growth rate slow down.

Statistical analysis attributes the bulk of the auto sales growth in India to excise duty reductions and not as much to GDP growth, implying strong price elasticity of demand. In other words, till now the bulk of the increase in affordability seems to have come from lower taxes and less from higher income levels. Going forward however,there’s not much room to cut excise duty, putting the onus on income growth to improve affordability. Growth rates have slowed down in the absence of further excise duty cuts We show that automotive sales growth typically slows down one to two years after an excise duty reduction despite strong GDP growth and another excise duty reduction is needed to refuel growth.

In the short term however, the industry is yet to see the full benefit of the recent cut in excise duty in December. So, the industry growth estimate for FY2010E is expected to rise to 7%. If we happen to see an increase in the excise duty to 10% from 8%, industry sales could increase by only 5%. so one can expect Maruti to gain share on the back of new launches, rural penetration and strength in entry segments.