Friday, 11 November 2011

Micro Level Trends – India Autos (Part 3) – VM's Alignment to the New Economic Headwinds

Having reviewed the fantastic growth story in India over the past decade (in Part 1) with recognition that the country's Automotive Mission Plan (AMP) must be truly strategically holistic, not 'part-picture' over-reactionary, and must be driven by competitive forces operating in ever more liberal auto-markets (in Part 2); this final weblog reviews the present strategic, operational and financial positions of the prime corporate players.

This done with the primary intent of better understanding those companies which may benefit by, or falter from, the growing concern of economic slowdown in India as a result of an increasing troublesome global economy.

The present picture shows s general decline of economic activity across the previously very brsk BRIC regions, with only the 'Next 11' countries showing buoyancy, yet these as a whole cannot off-set the broader EM markets slowdown. Those markets of course are still starkly buoyant compared to the Triad regions, but having experiences spiralling costs and diminishing competitive advantage relative to the historic global norm, themselves are undertaking macro and micro-level actions as the reality of a new 'self-preservation' period becomes part of the mid-term new norm.

The only region which shows (paper-based) growth traction is the USA, yet that growth will have been, and will continue to be, self-generated as the multiple QE programmes slowly release liquidity through Wall Street and into 'Main Street' America. However portions of that liquidity – investment-auto-motives believes – will be effectively held in reserve for mid-term drip-feed injection into those foreign lands which require reconstruction, ie the S. Mediterranean countries and North Africa in particular.

[NB Nonetheless, in the ethos and interests of true globalisation, the restructuring of the Eurozone and North Africa should be undertaken with agreed liquidity levels drawn from from the US, GCC, Brazilian, Russian, Indian, SE Asian & Chinese participants].

Thus even the US, as a consequence of its new era 'soft-power' policy will see immediate growth heavily restrained, with the possibility that any good-news economic indicators, which provide momentary optimism, may be under 'expectational par' or may need re-publishing. And, as mentioned previously, that necessary sizeable US corporate spending will be directed at US companies, as part of a more easily managed homeland restructuring process that both aids overall control and critically allows for value-creation to be seen to be working and witnessed at the Wall Street level.

Across the world then, in the short-term the previous demand for Indian goods and services will naturally diminish as each country seeks to replicate the US restructuring model, also recognising that home-grown growth will be a lead agenda issue, so leading to greater repatriation of trade flows, the self-sufficiency theme becoming increasingly common.

Whilst undoubtedly India will continue to export its goods and services – continuing to do so in autos – the general picture indicates one of reduced reliance on exports and imports and thus a case of 'battening down the hatches' across the corporate world, to ride the incoming choppy waves.

However, those Indian companies with noted North American presence will start to try and create balanced equations, restructuring and leveraging their own domestic cost-base so as to invest more in NA and so grasp opportunities to win US tendered contracts. Well managed - ie still heavily cost constrained - US exposure will then be seen in a positive light by institutional, PE and individual retail investors.
The Auto-Market Outlook (2012-13) -

As noted by sector participants, India impressive 2008-10 rebound was shaken by world events, namly Japan's Fukushima disaster and the MENA 'Arab Spring'; with more recently the Thailand floods. The 2010-11 Indian accounting period (March – March) was then shaken from its previous optimism, the last 2 quarters (Indian Q1 & Q2) providing greater concerns given the deepening of Eurozone* worries and reaction from Asian capital markets.

[* Please see post script]

The global economic headwinds facing India will result in contraction of vehicle sales to the private sector. Thus it is expected that hardest hot will be passenger cars, especially by those who were to be first time buyers, postponing purchase until the future looks brighter. Motorbikes, mopeds and scooters may also see contraction as buyers think twice, but here the demand curve will be less elastic given the lower price of these items compared to cars. Of greater importance will be the pricing effect of less new car sales on used cars, the latter typically seeing a rebound in values as people stay in used car territory yet the affordability factor still draws people upward from motor-cycles into the territory, thus used cars set to experience a dual inflow effect that will maintain residual values; that level dependent upon the level of contraction that new car sales ultimately experience.

Government departments and SME company buyers constitute a far greater percentage of new passenger sales than in western or Triad countries, so the 'fall-off' effect in unit should not be dramatic, but the contribution made by the private car purchaser may see a sharp decline, especially when it is noted that corporate budgets and spending are to be tightened, so affecting the now usual expectation of inflation related salary rises and the possibility of management and staffing levels.

In the distinction between small passenger cars and larger SUVs, given that the former are typically the domain of private buyer whilst the latter are typically bought by small company director, it will be those manufacturers serving 'the masses' that suffer proportionately more.

This then primarily affects the large small car exposure of TATA Motor and Maruti-Suzuki, with those operating in the fringes offering smaller older model small SUVs such as Premier Motor especially exposed. More lightly affected will be Hindustan Motor (Mitsubishi) compact sedan car sales given habitation of a different sub-segment with higher prices and lower volume expectantly purchased by the small company director set.

Whilst the expected broad economic contraction will then more heavily affect small cars, it should favour those companies which produce motorcycles, mopeds and scooters for the broad sweep of private, corporate and government sectors, the private and corporate buyers more likely to view the direct substitutional effects of 2-wheels vs 4-wheels.

In contrast to the passenger car market the Indian B2B Commercial Vehicles market, related to 3-wheelers, mini-CV, Light CVs Medium CV and possibly Heavy CV should remain buoyant as it is expected that the corporate world's spending cuts will not be as deep or quick as that of the private buyer. There may be concern regards the sale of the largest HGVs given the substantial outlay and investment recouperation / breakeven timespan; but any cancellation of orders in this sub-segment should provide for a boost in those below as fleet managers alter their fleet mix to suit the 'adaptability needs' any B2B downturn would require.

As a result, investment-auto-motives would advise investors to expect a 6-8% drop off of passenger car sales for the Indian FY2011-12, seeing a 12-15% fall in small cars specifically.

In contrast 2-wheeler sales may see a 5% improvement due to the size of the ongoing consumer wave in the segment less prone to reaction because of its affordability and the sports-bike sub-segment seeing a maintained boost as people deny themselves the new small car.

All the while, the commercial vehicle sector should remain ostensibly flat across all its sub-segments.
Balancing Growth & Fundamentals Analysis -

Consequentially, investors and analysts will necessarily need to modify and re-orientate their investment criteria. From that of wholly growth centric, focused heavily on on profitability ratios, efficiency ratios and market ratios, to encompass greater 'weight' given to liquidity ratios, activity ratios and indeed the 'foundational level' finances of companies which sit throughout the auto-sector value chain, either as part of (typically family led) conglomerates or as singular entities.

Company Reviews -

The following provides brief description and analysis of the 9 major players which span the truck/bus, car, 3-wheeler and 2-wheeler segments; each company typically operating across 2 of these distinctly separate sub-segments.

- Maruti-Suzuki
- Hindustan Motor
- Mahindra & Mahindra
- Ashkok Leyland
- SML Isuzu
- Force Motors
- Bajaj Auto
- Hero MotoCorp

[NB 1 Lakh = R10,000 and 1 Crore = R10,000,000)

Maruti-Suzuki India Ltd (MSIL) –

- 1970 creation of a private limited company named 'Maruti Technical Services Private Limited' to offer create value chain for "a wholly indigenous motor car".
- 1971 “Maruti Ltd” created the following year.
- 1977 scandal regards misdirected funds, near collapse. I
- 1981 partnership deal with Maruti Udyog Ltd and SMC of Japan.
- 1983 license of Suzuki Maruti 800; first modern/affordable small car.
- later licence of Suzuki 4WD appeared vehicles.
- 1988 first plant expanded to 100k units pa.
- 1991 - beginning of the liberalisation era – 65% of components 'Indian Made'.
- 1992 Suzuki increased its stake to 50% (with 50% nationally held).
- Capacity grew to an additional 200k units with new second plant..
- 1997-8 friction between Suzuki and Maruti Udyog regards “government proxy”MD.
- 2000s expansion of product portfolio to retain position as No1
- 'horizontal' expansion and integration policy implemented
- increasing competition from domestics and foreign (esp Hyundai Motor No2)

The present BoD is led by MR R.C. Bargava (Chairman) and Mr Shinzo Nakanishi (MD & CEO).

The company's success is a consequence of its parent companies scale and international leverage, consistent model renewal provided a story of ever growing market grasp across car, small utility and small 4WD /SUVs, with product range expansion creating/capturing new markets. Complimentary new initiatives such as an Emergency Rescue Service and by 2000 a Customer Call Centre and creation of a (PPI funded) National Driving School, Insurance Services and Financial Services for dealers and car-buyers. 2003 saw an IPO on BSE and NSE. 2005 its 5 millionth car.
The company has two manufacturing facilities located at Gurgaon and Manesar, south of New Delhi, India. Both the facilities have a combined capability to produce over a 1.2 million units pa, and there are plans to expand its manufacturing capacity to 1.75 million by 2013.

Since June, labour unrest in the 2 Haryana plants has undermined production, public confidence and market share. The face-lifted Swift model (a prime seller) has faced delivery shortages and so cancelled orders & migrated sales during the Diwali festivities, a peak sales period. This added to increased input costs squeezing margins, and high interest rates undermining sales volumes has made the Indian Q2 painful, Maruti's market share declining heavily. This adds to previous market share slide already underway, now Hyundai taking 21.7% market share, TATA Cars 16.4% and Mahindra 11.7%.

Those sales provided for a 2010-11 (vs 2009-10):
Net Income of Rs3,61,282m (vs Rs3,01,198m).
Net Sales of Rs41,467m (vs Rs44,510m)
PbT was Rs31,088m (vs Rs35,925m)
PaT was Rs22,886m (vs Rs24,976m).
EPS of Rs79.22 (vs Rs86.45)

Operating Margin of 8.6% (vs 11.9%)
[using PbT / Turnover less Excise Duty]
Hindustan Motor -

- flagship division of Birla Technical Services (of Birla Group).
- Birla Group (Birla family), commercial roots in India reach back to 1857
- (Technical Services division also specialises in oil and gas).
- 1942 Hindustan Motors established in Gujurat, ,
- moved to West Bengal and later moved HQ to Kolkata.
- known for the long-standing Ambassador car (long used by government and taxi operators)
- 'Indian establishment' roots gave SVO arm for vehicle armouring.
- enters JV with auto-parts company Sriram Group

Led by C. K. Birla (Chairman) and Manoj Jha (Managing Director), Hindustan Motor operates what its states to be ”the first and only integrated automobile plant in India: the Uttarpara factory, popularly known as Hind Motor.

The company operates a twin-mode business template, manufacturing for itself and offering contract production for another. It makes and sells the Ambassador (in sedan & pick-up forms) and the 'Winner' mini-truck. Also operating an alliance deal with Mitsubishi vehicles. Thus its can be said to notionally span a number of sub-segments: Fleet (Government, Taxi, Other), LUV (with incursion into 3-wheeler territory), passenger cars (via Mitsubishi) and SUVs (via Mitsubishi). It operates 3 plants in Utterpara near Kolkata (Ambassador), Pithampur in Madhya Pradesh (Winner mini-truck) and Tiruvallur near Chennai (contract manufacture for Mitsubishi products).

Given that it has a broad vehicle mix and dual-client manufacturing base, the company is no doubt viewed by Indian analysts as typical of the broad exposure mentality reflected in the bigger conglomerate - indeed Indian mentality. Reducing higher risk, cyclical exposure to specific segments, and so enabling an income off-setting.

However, the ongoing natural sales decline of Ambassador (in both segments) has and is a cause of real concern, with an apparent 20% plant utilisation. HM mentioned the launch of a smaller model based on the Ambassador, though it seems very dubious and unlikely that a new car would be developed on this basis, seemingly a PR story to maintain dealer confidence. In mid 2011 it mentioned manufacture of a niche (what it calls) 'James Bond' Mitsubishi product, which again appears 'over-selling', though perhaps alluding to a special series of the Evo.

Its stated aim is to rebalance the present 80:20 CV vs Cars bias, and to re-fill its 50k unit pa capacity. Exactly how it will do so is currently questionable, though the Ambassador pick-up (Veer) available in body-side and flat-bed versions should provide a much needed volume boost from its current low, if marketed with adroitness possibly doubling or more of volumes. Whilst 'neither fish nor fowl' (car or forward control truck) it is a very worthwhile low-risk exploration to assist turnaround, and may give a whole new lease of life to Ambassador.

Those sales provided a 2010-11 (vs 2009-10):
Net Income of Rs 85,004.15 lacs/lakhs (vs Rs 73,688.03 lacs).
Net Sales of Rs 66,152.71 lacs (vs Rs 57,404 lacs)
PbT was Rs -376.12 lacs (vs Rs -3326.37 lacs)
PaT was Rs 75.23 lacs (vs Rs -5,110.02).
EPS of Rs 0.05 (vs Rs -3.17) lacs

Operating Margin of -0.44% (vs -4.5%)

TATA Motor –

- founded in 1945 (formerly TELCO) to produce locomotives.
- first road based commercial vehicle created in 1954 with Daimler-Benz.
- Over four decades effectively held Truck duopoly with Ashok Leyland
- 1991 Liberalisation forced diversification into MUVs/SUVs and later Cars
- sold over 4 million vehicles in India sold since.
- part of TATA Group (Steel, Autos, Consulting, IT, Data, Telecoms, Chemicals, Energy, Hotels & Tea).

With an HQ in Mumbai, TATA Motor has tended to be the more progressive (first mover) amongst India's VMs, a necessary stance given the competitive landscape. Between 1998-2008 the decade long focus was on developing SUV and small car capabilities. This since followed by the M&A era.

2004 – Daewoo Truck (South Korea).
2005 - (21% of) Aragonese Hispano Carrocera (Truck & Bus) (Spain).
2007 - Marcopolo Coach (Brazil)
2007 – FIAT (JV) India
2008 – Jaguar Land Rover (Premium Car & SUVs) (UK) [inc Daimler & Lanchester brands].
2009 - Hispano Carrocera (full takeover)
2010 - (80% of) Trilix Engineering (Vehicle Development) (Italy)

TATA Motor is dual-listed on BSE & NYSE stock markets

The ten member BoD members are led by Ratan Tata (Chairman) and Ravi Kant (Vice-Chair).

Given the broad-based acquisition spree over the preceding 6-7 years the company will be in the midst of consolidating the efficiency of ownership to reap rewards as soon as possible. These interests provide for greater global coverage, new vehicle absorption to replace & extend the domestic range, entry into new segments, access to advanced engineering materials and methods and capture of best practice processes. So the task of ongoing incorporation of foreign companies into the TATA fold, whilst in parallel circulating Indian management & employees in those firms.

As part of TATA's desire to climb the value-curve, R&D in powertrain and structures appears to take priority, no doubt deep learning made available from JLR & FIAT (in steel & aluminium** see post script) and (deisel & petrol), not only assisting TATA branded NPD in Cars, SUVs and utility 4WDs, but feasibly bearing technology transfer fruit for the Truck and Bus divisions.

Much of TATA's apparent alternative, progressive attitude is exemplified via its Nano model, which though unorthodox in wheel size and engine rear location, may well be viewed as much symbolic as commercial. Like the original Mini, the car has been slow to be accepted, and as such will require ongoing financial support until it is seen as a true alternative to a used conventional car. That car's sales totals to date crossed 100,000 units in 2010-11.

R&D work has been directed at EV models and exploration of Compressed-Air Car, but the former will presumably only be purchased by an eco-conscious government and companies whilst the latter has equal (indeed greater) fundamental functional shortcomings.

Strengthening the Sales & Service Network to support new products will be key, since although
Tata Motors has >250 dealerships in >195 cities across 27 states and 4 Union Territories of India, this ranks 3rd after the bigger Maruti Suzuki and Hyundai networks.

Manufacturing and assembly plants are located in Jamshedpur, Pantnagar, Lucknow, Sanand, Dharwad and Pune, India, and internationally, in Argentina, South Africa, Thailand and the United Kingdom.

The company's consolidated FY2010-11 results (ending March 2011) illustrated that worldwide sales grew to a record of 1,080,994 units, equal to 24.2% YoY growth. Of these TATA Motor branded vehicles (all types) reached 836,629 units, representing a growth of 25.2% . In the domestic market, CV sales increased by 22.7% year-on-year to 458,828 units (vs 373,842 the previous period), its market share a reported 61.8%. Passenger vehicles, including FIAT and Jaguar & Land Rover vehicles distributed in India, grew by 23.0% year-on-year in the domestic market to 319,712 units (vs 260,020 in 2009-10), market share at 13.0%. Exports rose to 58,089 from 34,109.

Sales of the TATA passenger vehicles sales crossed 2,000,000 since inception, in FY 2010-11.

Those sales provided 2010-11 (vs 2009-10):
Turnover of Rs 51,902.93 crore (vs 38,144.83 crore)
Net Sales of Rs 47,807.42 crore (vs Rs 35,373.78 crore)
EBIT of Rs 3,487.63 crore (vs Rs 4,853.83 crore)
PaT was Rs 2,196.52 crore (vs Rs 2,829.54 crore).
EPS of Rs 30.28 (vs Rs 42.37)

Operating Margin of 7.3% (vs 13.7%)

Mahindra & Mahindra –

- founded in1945 in Ludhiana as Mahindra & Mohammed, by brothers K.C. Mahindra, J.C. Mahindra and Malik Ghulam Mohammed.
- 1948 the present name was established.
- initially processing steel, took the license for the Willys JEEP
- developed tractor section, then MUVs, CVs, SUVs, Pick-Ups, Cars & 2-wheelers
- today a subsiduary of Mahindra Group (Autos, Aerospace, Agribusiness, Construction, Defense, Energy, Finance, Insurance, Industrial Equipment, IT, Leisure, Hospitality, Logistics, Property & Retail).

The company seeks to use its sizeable domestic presence and well known brand to both attract JV partners by which to either contract produce, or itself enter new auto-segments, using its typically Indian 'roll-over profit' balance sheet reserves for M&A purposes.

2000 – Ford Ikon/Classic (ended 2011)
2005 – Navistar/International Truck, (USA)
2007 - Renault/Dacia Logan (France, Romania) [the M&M Verito].
2008 – M&M Scorpio CKD agreement with Bavarian Auto Group (Egypt)
2009 – M&M Pick-Up models CKD agreement (Brazil)
2010 – Reva EV (India)
2011 – M&M purchase of Ssangyong Motor (S. Korea)

The BoD lead members are XXXXX (Chairman) and (Vice Chairman) and Rajesh Jejurikar (CEO). Dow Jones Newswire reports that Jejurikar has resigned but will stay in situ until January 2012.

Much of this external learning allowed M&M to undertake its own small SUV project (code-named W201), to be released as the XUV 500, and it says is a platform that “could be used for developing more SUVs”. Beyong the domestic market, M&M seeks export sales in South Africa, Europe, Africa, Australia and Latin America. This then 'book-ends' the mid and large sized SUVs acquired from the Ssanyong acquisition, providing a broad and relatively modern SUV portfolio.

The XUV500 better naturally mates with the Verito car model (from Ranault Dacia), however that JV relationship looks to have been under strain when reading between the lines. One M&M exec states that..."a little over a year ago we took over the platform and brand from Renault. That time we used to sell 300 units per month and now we are at 1,710 units, so we have been able to grow in the sedan segment”...indicating that sales were previously suffocated and latterly promoted.
The REVA EV is set for introduction at some point, but it looks to realistically be little more than a PR exercise producing limited numbers for Indian eco-projects and EV enthusiasts amongst the metro elite, thus re-running the 'big-exposure but small-impact' story seen in the UK and Europe.

Building on its competencies in Farm Equipment, Mahindra Tractors(China) Co. Ltd. Was established to manufacture tractors for an expanding Chinese market, and is used as the export portal to the USA and elsewhere. It maintains its No1 domestic position, August 2011 sales up 21% YoY at 15,059 units.

The 2-wheeler business has experienced production problems, the launch new Stallio motorcycle having been postponed 3 times, but still set to ride the sector's ongoing positve growth story.

Like TATA, the company has increasing worldwide presence: Mahindra Europe Srl. based in Italy, Mahindra USA Inc., Mahindra South Africa & Mahindra (China) Tractor Co. Ltd.

Mahindra & Mahindra Limited is listed on the BSE.

Those sales provided for a 2010-11 (vs 2009-10):
Turnover of Rs 24,850.22 crore (vs Rs19,832.06 crore)
Net Income of Rs 22,757.51 crore (vs Rs 18,038.05 crore).
EBIT of Rs 3,402.13 crore (vs 2,756 crore)
PaT of Rs 2,662.1 crore (vs Rs 2087.75).
EPS of Rs 46.21 crore vs Rs 37.97 crore)

Operating Margin of 11.7% (vs 8.64%)

Ashok Leyland -

- founded in 1948 as Ashok Motor to assemble Austin cars
- 1955 onward a focus on commercial vehicles
- equity split with Britain's Leyland Motors, using Comet truck as base for bus product
- nationwide success amongst public and private bus operators
- replaced by the bus specific Tiger model and by Titan double decker.
- 1980s onward similar business model for Trucks, with FIAT & Ford UK
- and with Engines with (Toyota) Hino.
- since 1987 the company has been a flagship subsidary of the Hinduja Group (Foundries, Autos, Defence, Oil, Banking, IT, Media, Health)

Ashok Leyland, may not be aswell known to non-Indian observers as TATA, but is renowned as India's Truck and Bus producer, with additionally the assembly of Emergency & Military vehicles, Components and Engine Sets for Marine & Industrial applications, and more recently inclusion of a Power Sets section for independent static based power generation. To date its basic business model to buying the licence and tooling for previous generation vehicles and engine sets.

The 'old tech' products have historically been embraced by smaller truck and bus operators for 'repairability' (depot and roadside) but the brand had been increasingly seen as aged 'old India', something recognised internally in the early 2000s. To combat JVs and acquisitions were embarked upon:

- 2006 acquired Avia (Czech Republic) [Avia Ashok Leyland Motors s.r.o]
- 2007 JV with Nissan
- 2010 acquired (26% stake) in Optare (UK)
- 2007 JV with Nissan Motor

The main BoD members sit in the Chennai HQ, and consist of Mr Dheeraj Hinduja (Chairman), Mr R Seshasayee (Exec Vice- Chairman) and Mr. Vinod Dasari as the Managing Director. Mr Hinduja replaces Mr R J Shahaney who recently stepped down as Chairman.

It has been stated that Avia will providing a foothold in the highly competitive European truck market, and has major room for improvement given that recently its output is only 20% capacity (1,200 units in 2009-10). However, the EU+ truck sector is very competitive, with entrenched players and buyers, so although A-L may obviously see ramp-up potential, invetsment-auto-motives suspects that ultimately Avia tooling etc will be taken to India and serve A-L's own-brand ambition.

The buy into Optare - which specialises in the smaller class of urban 'runabout/hopper' bus – looks to take advantage of the growing trend for smaller local area and intra-urban routes, and to take advantage of the needs of the school, college & university sector and organisations that require daily route-pick-up and drop-off transport for its students, staff and members. Optare also has apparently made advances in hybrid powertrain, a system better suited to small bus segment, thus also useful for A-L's own R&D.

The agreement with Nissan was to create 3 linked companies for: a) vehicle production, b) powertrain production and c) mutual development, A-L holds a 51% majority stake in vehicle production, Nissan 51% in powertrain and equal 50:50 split in development.

Rated as No2 in In Trucks (after TATA), A-L spans 7.5 – 49ton classes. Historic focus was in the 16 - 25 ton segment, but this broadened into the lower LCV class via the Nissan JV. However, A-L is noted as No1 Bus producer, with capacities spanning 19 - 80 seaters.. It has 7 production plants. 2008 annual sales were about 60,000 vehicles, and about 7,000 engines. 2008-9 sales of 54,431 medium and heavy vehicles. 2010-11 sales of 94.100 units. Presently it has a build capacity of 105k units p.a. And is rated about 20th in world rankings of truck company size.

Ambitions are to become a global Top 10 player, with aspirations of doubling its sales of MCV and HCV output over the next 5 years, this underpinned by its level of investment in fabrication & machine tools and production engineering, Vinod Dasari remarking that over 80% of A-L vehicle output is made from plant machinery 5 years old or younger.

R&D has spanned all electric, hybrid, CNG and H-CNG (20% Hydrogen), whilst new CapEx projects include a new plant in North India and a Bus Body assembly plant in mid-east Asia.

Thus we see that A-L seeks to continue its historic trend of purchasing 'ready-made' vehicles from foreign sources in order to directly buy product types suited to Indian market trends and absorb best practice & technical advances, whilst simultaneously contract manufacturing for others so as to also gain exposure and capture additional technology knowledge.

Those sales provided for a 2010-11 (vs 2009-10):
Net Income of Rs 11,117.71 crore (vs Rs 7,244.71 crore)
PbT was Rs 801.8 crore (vs Rs 544.78 crore)
PaT was Rs 631.3 crore (vs Rs 423.63 crore).
EPS of Rs 4.75 (vs Rs 3.18)

Operating Margin of 7.2% (vs 7.5%)

SML Isuzu -
(previously Swaraj Mazda)

- established in 1983 as Truck sector parallel to ambitions of Maruti Suzuki
- previously owned by Sumimoto of Japan and Punjab Tractor
- Sumimito buys-out Punjab Tractor
- creates capabilities in task-specific variants of MCV vehicles
- develops capabilities in HCV via Isuzu
- majority share (54.96%) held by India's Promoter Group

SML Isuzu manufactures LCV / MCV, Luxury Bus (Coach) and Special Vehicle products. It offers vehicles from both SML and Isuzu branded stables; the former serving the plethora of generally smaller trucks and buses and variants for organisation based clients at a lower price level, whilst the latter serves a smaller higher priced markets for larger truck and coach. Plans are to access the new sectors of: multi-axle trucks, refridgerated trucks and articulated-truck tractor-cab units, also seeking to offer the Isuzu D-Max pick-up.

The company's HQ is in Chandigarh.
It is not publicly listed for open share sales.

The BoD is led by Mr SK Tuteja (Chairman) and Mr Y. Watanabi (MD & CEO).

In fiscal 2010-11, the Commercial Vehicle (CV) Industry experienced sales of 7,53,000 units
(vs 5,76,400 units a year previously). Within the 5.0 ton to 12.0 ton GVW segment in which SML Isuzu operates, sector sales reached 99,500 units (vs 83,000 units) thus 13.2% of aggregate volumes. Of these the company sold 12,870 vehicles (vs 10,133 units previously), a record volume,
with an increase in market share to 13% (vs 12.2%). Vehicle sales plus spare part sales provided record revenue.

However sales targets set were not reached, and consequently, capital expenditure for a luxury coach expansion project was restricted for the time being. Furthermore the expected level of segment sales for luxury coaches failed to meet expectations, thus of the Rs1800 lahks monies that were to be utilized by March 2011, only Rs.321.70 lacs is to be spent.

The increasingly constrained macro-environment thus set a cautiously optimistic strategy using lower key product and sales initiatives across H1 of 2011-12.

Those sales provided a 2010-11
Net Income of Rs.893.0 crores (vs Rs. 722.2 crores)
PbT was Rs.51.4 crores (vs Rs. 30.4 crores)
PaT was Rs36.55 crores (vs Rs21.46 crores).
EPS of Rs25.26 (vs Rs19.44)

Operating Margin of 5.7% (vs 4.2%)

Force Motors –

- founded in 1958 as Firodia Tempo Ltd by N.K.Firodia
- originally licensed German Hanseat 3-wheeler & Matador truck
- renamed Bajaj Tempo after partial acquisition by Bajaj Auto

Today the company's portfolio includes 3-wheelers, Tractors, Mini-Trucks, MUVs, LCVs, Vans, Trucks, latterly SUV and a desire to capture a portion of the MPV segment and ambitions for a premium SUV

The BoD's primary positions are held by Abhay Firodia (Chairman) and Prasan Firodia (M.D.),

As with much of the Indian auto-sector, Force Motors has historically bought the licence to manufacture previous generation vehicles from western VMs. The same route for engine sets, with a simultaneous effort to contract manufacture engines for others, such as Daimler.

- 2008 50:50 JV with MAN Trucks in HCV segment (“MAN Force Trucks”)
- 2011 announced MPV using (Vito) Daimler platform (for Van & MPV variants)

The 2010-11 Annual report noted that the 2009-10 growth story continued, with growth across all the segments Force Motors operates within. It welcomed the “rising standards of competition, technology, environmentalism and safety”, seen as beneficial to the auto-industry's ongoing improvement. Force Motors sold: 19,822 LCVs (inc small vehicles), 6,215 of MUVs (Multi Utility Vehicles), 1,013 Tractors

Exports saw growth in 2010-11 vs 2009-10, to a value of R27.17 crores from R26.96 crores, helping to fund technical consulting assistance commissioned from Germany via an independent expert, Mercedes-Benz Project Consultation GmbH and MB Technology GmbH. R&D for tooling and project costs were 2.26% of company turnover.

A labour relations legal case with Pithampur Plant staff is ongoing but cordial relations remain on the shop floor itself thus not expecting any disruption in production.

Those sales provided a 2010-11

Net Income of Rs 1481,43,74,099 (vs Rs 956,03,39,962).
PbT was Rs 82,13,21,341 (vs Rs 42,88,48,470)
PaT was Rs 58,61,78,955 (vs Rs 60,42, 25,926).
EPS of Rs 44.49 (vs Rs 45.86)

Operating Margin of 5.5% (vs 4.5%)

Bajaj Auto –

- established by Jamnalal Bajaj in 1926 with imported vehicles
- Kamalnayan Bajaj (son) leads from1942.
- Baja Auto formally incorporated in 1945.
- 1959 licence granted to manufacture vehicles
- 1960 IPO
- Rahul Bajaj leads from 1965.
- 1970 sees 100,000th vehicle produced
- 1977 sees 100,000 vehicles produced that year.
- broadened products from (business) 3-wheelers to (consumer) 2-wheelers.
- model improvement and new product expansion
- a division of Bajaj Group (Iron & Steel, Autos, Home Appliances, Lighting, Travel, Insurance, travel & Finance).
- the demerger of Bajaj Auto Ltd into three separate corporate entities:
Bajaj Finserv Ltd (BFL),
Bajaj Auto Ltd (BAL), and
Bajaj Holdings and Investment Ltd (BHIL)—

Bajaj's association with 3-wheeler tuk-tuks is renowned, with its previous expansion into 2-wheelers a natural expectation to broaden the business base and lessen reliance upon a largely commercial marketplace.

Its HQ is in Pune, with production plants in Pune, Uttarakhand and Waluj Aurangabad.

The BoD is led by Rahul Bajaj (Chairman since 1965), Madhur Bajaj (Vice Chairman) and Rajiv Bajaj (MD) and supported by Sanjiv Bajaj (Exec Dir), Shekhar Bajaj (Dir) and Niraj Bajaj (Dir).

The 2008 buy into Austrian bike-maker KTM - worth 40% in shareholding - provided for mutual synergies between the companies. KTM is renowned for its Motocross bikes and has further developed its Road-bike range, thus Bajaj & KTM able to undertake R&D and development together aswell as cross-sell (badge-engineered) products in their different primary markets as possible. This allows Bajaj to introduce Moto style bikes and seize the opportunity for Moto-style products as has been the major trend in Europe over the last decade (as per BMW bikes).

As a result it has jointly developed its 125cc and 250cc ranges.

[NB Furthermore KTM's exploration into street legal race-track cars with its X-Bow model provides for an exciting alternative and very tentative entry into the car market, potentially able to further boost the Bajaj brand with a unique, limited volume track-road 'race car' for emerging track-day events at the Buddh International Circuit and elsewhere. This would precurse any attempt for a similar attempt at a higher price point by Force Motor – see below].

After a failed alliance attempt with Renault to produce a competitor to TATA's Nano small car, expected low-cost small car, the idea could remotely, but possibly be born through the KTM alliance. Though a 'developmental stretch' for both parties it might produce something as, if not more radical, as Nano.

2010-11 sales were a record 3.82m units; consisting of 3,387,043 motorcycles and 436,884 three-wheelers. Exports crossed rose by 35% to 1,203,718 units.

The Chairman's own words depict the very successful 2010-11 period...”No doubt, some of this excellent performance was on account of a smart rebound of the Indian economy, which has grown
by 8.6% in FY2011 — second only to China. After all, the year saw total motorcycle sales by the industry increasing by 24% to 10.5 million units. However, sales grew significantly faster than the
market. For instance, Bajaj Auto’s total motorcycle sales increased to almost 3.39 million units. Similarly, while domestic motorcycle sales in the aggregate grew by 23% to a bit over 9 million units, domestic sales rose by more than 35% to over 2.4 million”.


Those sales provided a 2010-11
Turnover of Rs 16931.53 crore (vs Rs 12118.08 crore )
Net Income of Rs 15998.12 crore (vs Rs 11508.5 crore).
PbT was Rs 4350.75 crore (vs Rs 2411.13 crore)
PaT was Rs 3339.73 crore (vs Rs 1703.63 crore).
EPS of Rs 115.4 (vs Rs 58.8)

Operating Margin of 27% (vs 21%)

Hero MotoCorp (previously Hero Honda)-

- established in 1984 JV of Hero Cycle and Honda Motorcycles
- created to provide Indian manufacturing competence in the sector
(as per Maruti Suzuki and Swaraj Mazda).

- Mujal Bros buy-out 26% sharehold from Honda (of Hero-Honda)
- India's Promoter Group own 52.21% of Hero MotoCorp's shares.
- 2011 company renamed

The brand could be said to be the the 2-wheeled equivalent to Maruti. Created to give India an internal modern technology competence in the development and production of scooters, mopeds and motorcycles, and critically give Hero Cycle a new commercial avenues beyond diminishing use of pedal bikes.

(Thus was at the time a re-run of technical licensing previously seen with Enfield motorcycles et al, except using the Honda base of a broad product range). Its HQ is in New Delhi, and operates 3 plants; two in Haryana and in Utterakhand

It is reported that Hero-Honda has sold over 50m units in its history, and the old-new entity sells more two wheelers than its 2nd, 3rd & 4th ranked competitors combined; the Splendor model being the prime seller at >1m units p.a.

Plants are based at Dharuhera, Gurgaon in Haryana and at Haridwar in Uttarakhand, combined a capacity of 3 million units per year. HeroMotoCorp has a over 3000 sales and service points across India, and seeks to achieve revenues of $10 billion and volumes of 10 million two-wheelers by 2016-17.

Hero MotoCorp is listed on the NSE

The BoD is lead by Mr Brijmohan Lall Munjal (Chairman) and Pawan Munjal (MD & CEO)

The purchase of 100% of shares thus should provide Hero Group with an ability to capture the business' full income stream, which it hopes to boost further as the termination of the JV leaves Hero MotoCorp free to export internationally, whereas it only previously had licence to export to Sri Lanka.

However, given that it was indeed Honda technology that underpinned the JV, the new company will either need to develop motorcycle systems itself and/or rely on an external alliance.

During the fiscal year 2008-09, the company sold 3.7 million bikes, a growth of 12% over last year. In the same year, the company had a market share of 57% in the Indian market.

In 2010-11 the 2-wheeler market consisted of 13,413,312 sales (vs 10,574,835 in 2009-10),
Motorcycles represented 10,500,004 (vs 8,444,173), Scooters 2,209,595 (vs 1,559,173) and Mopeds 703,713 (vs 571,489). Hero took 54.6% of India's motorcycle market and had a 44.5% market share in scooters & mopeds, selling 5,402,444 units (vs 4,600130 the previous year) giving 17.4% growth.


Those sales provided a 2010-11
Net Income of Rs19,670 crores (vs Rs16,099 crores).
Net Sales of Rs19,245 (vs Rs15,758)
PbT was Rs2,405 (vs Rs2,832)
PaT was Rs1,928 (vs Rs2,232).
EPS of Rs96.5 (vs Rs111.8)
Dividend of Rs105 (vs Rs110).

Operating Margin of 11.4% (vs 16.2%)

Conclusion -

The previously depicted 9 companies span the full spectrum of the Indian automotive sector.
Each has undoubtedly ridden the wealth creation wave India has enjoyed through the 1990s and 2000s, possibly an unparalleled period of Indian economic strength enjoyed by its people and corporations.

Yet the global economic headwinds that have come to the fore over the last 12 months look set to take a toll on economic well-being, something that Chairmen, MD's and CEO's appreciate. The story at Maruti-Suzuki may foretell problems elsewhere, by which a highly expectant workforce, well used to the good time years, is not yet cogniscent of the broader slowed picture, and so make unrealistic demands which in turn interupts output and the cost-base and so inadvertantly helps to undermine the corporate position, job security, local economy and wide economy health. Yet ironically at the same time such pressures mean that executives must come to grips with the fundamentals of the business, its cost base, its operational structure and strategic position..

The macro-economic headwinds however, blow over different companies in different ways, depending on their exposure to their product's general market, pricing elasticity and substitutional effect. In autos the headwinds that quickly directly effect consumer spending bode greater ill for passenger car producers, than for commercial vehicle firms, and may indeed create a consumer migration effect away from cars in general (new and used) and toward far more affordable 2-wheelers so boosting the outlook for such providers.

The accompanying graphic (at the top of screen) depicts the exposure levels of each manufacture to each vehicle segment type. It then provides a very macro-orientated view of those that are poorly, squarely, or best positioned to face the near and medium term.

The above mentioned Operating Margins for each firm and relative positions on the 'macro-map' make the basic case clear to all, (though each company of course deserves far closer consideration by investors).

It could well be another period that encourages further structural change in the Indian industry, between indigenous players and between themselves and foreign multinationals and expert service providers. Yet there are also those who being progressively-minded are already in the process of shaping themselves to meet the challenge.

It is a behaviour pattern that should be critically viewed and mimicked by all a sector participants.

Until very recently, most companies have been characteristically similar, in as much that endemic family / conglomerate control has been handed down from father to (typically) son, and that the firms were were themselves established at critical watersheds during the country's past: merchants in the colonial period, new industrialists during independence and technology appropriators in the early 1980s.

But the success of the 2000s has perhaps masked, now markedly juxtaposed by the global slowdown, may create the shifting of tectonic plates of commercial India.

Given the protected state of markets up until 1991 – though arguably realistically semi-protected ever since - the families, as the Indian elites, have understandably sought to maximise the returns on their original investment. Thus the well proven formula was to adopt licences, tooling and products (of all descriptions) from British, Germans and Japan sources, and ensure decades-long lifecycles. That ensured that original monetary layout was reduced, that cost relatively quickly amortised from output, requiring additional expenditure on tools and jigs on an adhoc basis, whilst enabling an absorption of increasing input costs and when necessary - as in times of economic slowdown. Critically the business model gave an great deal of 'business elasticity', able to maintain lower pricing during slump periods and boost profits during upturn periods.

As one would expect, it is a business model that few families and conglomerates wish to see quickly replaced, but not doing so endangers India of being left in the technological dark ages. Thus given the need to 'serve Mother India's population', 'integrate with the world at large' and 'produce profits' there has had to be a commercial balancing act, that accords more than most to the 'mixed economy' philosophy. India may on the surface see itself as the dynamic equivelent to China or the old US, but appearances are still somewhat deceptive, and there are very real differences between the 'Indian way' and elsewhere.

One such to date is the use of somewhat antiquated accounting procedures - seemingly closely linked with the British methods of the Victorian era - which has both positive and negative aspects.

They allow for a far greater roll-over of (ie retained) profits year after year, 'brought forward' to the next year's balance sheet. Effectively a liquidity-driven model. This then has the positive outcome of ensuring a firms stability, something that India and its families has long understandably held sacrosanct – and can be indeed be assisted by the BoDs choice to pay out a small stock dividend relative to overall EPS.

The more negative argument that may be stated is that such monies are not being used in the broader economic picture, thus not only viewed by investment bankers as 'dead funds', by viewed by economists as anti-circulatory, possibly holding back the economy and possibly raising the cost of capital for others. Moreover, whilst the accounting practices follow the same basic formula, the Indian currency practice of talking and reporting using 3 ways (Rupee, Lakh & Crore) adds complication when reviewing accounts, especially against international peers. This only really negated by those firms which are publicly listed on foreign bourses.

Thus India could be said by default or virtue to have created its own economic, corporate and reporting eco-system.

And as stated it is one that may well come under even greater pressure as the weak-spots of its economy and old-family firms become more visibly apparent.

India's necessary task in the automotive sector and elsewhere is to try and balance the firm's agenda to operate as an instrument of social good, whilst also avoiding the apparent complacency that even since 1991 could be said to exist, and obviously committed to ethical profit maximisation. Itmust look again at the speed and depth of its liberalisation programme, better align itself with international investor requirements; and possibly even create the basics of an economic template that can be exported to the west, one which aligns all stakeholder needs.

The size and mid-speed dynamic of the auto-sector (compared to slow evolution of agriculture or rapid evolution IT) means that it could feasibly play a role in developing that more holistically-minded economic model.

Good Luck India...अच्छे भाग्य

Post Script -

India's press reporting – as read from some executive comments - appears to suggest that Turkey is viewed as problematic to the Eurozone. Whilst the Turkish economy is viewed as 'overheating' and is heavily EU exposed via exports, as a non EU member with stronger structural economy (good capital markets plus lower wage climate) it should not be viewed by India as a similar positioned 'periphery country' to Greece, Italy, Spain or Portugal - as seems the case.

Though investment-auto-motives refuted the feasibility of “Indian Lightweighting” across the whole of the India auto-sector, so as to provide a national USP (ie “Radical Lightweighting”), it does promote efforts of 'technology trickle-down' whereby on a project by project basis, with convincing business case, conventional mass-manufacture steel vehicles incorporate 'assistive solutions' “Practical Lightweighting”. To this end, given the TATA ambition, investment-auto-motives expects to see TATA include such efforts, primarily to demonstrate its USP to the Indian public in passenger cars, esp versus Suzuki Maruti and foreign competition.