CRISIL CRBCustomised Research Bulletin

Sector Focus: Automobile

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September 2012
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CRISIL Customised Research Bulletin CRB


































































































Foreword
In this edition of Customised Research Bulletin, we present our views
on the 'Automobile' sector.

The Opinion section presents our analysis on whether additional taxes
on diesel Cars & UVs will help reduce petroleum subsidies. Given the
sensitivity to significant hikes in diesel and LPG prices, the government
is evaluating other options to manage the subsidy bill. However, CRISIL
Research believes that this will not reduce the subsidy burden
significantly or will be difficult to implement.

This edition also features an interview with our sector expert, Manoj
Mohta, Director Customised Research.

We are confident that you will find this report highly informative and
useful.


Prasad Koparkar
Senior Director
Industry & Customised Research
CRISIL Research






































































































Opinion
Will additional taxes on diesel cars & UVs help reduce 01
petroleum subsidies?

Interview
Mr. Manoj Mohta Director, Customised Research 03

Economic Overview October 2012 05

Industry Overview
Cars and UV 06
Commercial Vehicle 08
Two-wheeler 10
Auto components 11

Independent Equity Research Report
Hero Moto Corp Ltd 13

Customised Research Services
Automobiles 14

Media Coverage 15
Contents

CRISIL CRB Customised Research Bulletin

1

In the 2012-13 Union Budget, the government has set
stringent targets to contain its subsidy bill, of which
petroleum subsidies form a third. The options being
considered include imposition of a one-time tax on new
diesel cars & UVs sold or an annual usage-based levy
on existing diesel cars and UVs, which are aimed at
reducing the preference for these vehicles and thereby
bringing down diesel consumption. CRISIL Research,
however, believes these options will not bring down the
subsidy significantly or will be difficult to implement.
Furthermore, diesel cars & UVs account for just over a
tenth of the diesel consumption. To bring about a
sustainable reduction in the subsidy burden, the
government had to hike diesel prices, and in future too
it needs to ensure that diesel prices move in
accordance with crude oil prices.

Rs 5 hike in diesel price: A small step towards
containing subsidy burden
The recent Rs 5-plus hike in diesel prices has again
turned the spotlight on petroleum subsidies, which
account for nearly a third of the Rs 2,163 billion subsidy
bill in 2011-12. In the Union Budget 2012-13, the
government has targeted to contain its petroleum
subsidy bill at Rs 436 billion, about 40 per cent lower
than in 2011-12.

In 2011-12, petroleum subsidies shot up by almost 80
per cent to Rs 685 billion as crude oil prices rose and
the rupee weakened. Within petroleum subsidies, diesel
alone takes up about 60 per cent. Under-recoveries on
diesel are at an all-time high of Rs 11-12 (as of
September 2012) per litre at current diesel prices. With
the 5-rupee hike in diesel prices, the government has
taken a small step towards reducing the subsidy
burden.

Rising share of petroleum subsidies in total
subsidies

Note: Other major components of the subsi dy bill include
food and fertilisers
Source: CRISIL Research

Imposing additional taxes on cars and UVs
offer limited benefits
Given the political compulsions that prevent major hikes
in diesel and LPG prices, the government is evaluating
other options to discourage diesel consumption and
reduce subsidies. The options being discussed include
the levy of a one-time tax on all new diesel cars and
utility vehicles (UVs) sold and collecting an annual tax
from all diesel cars and UVs based on usage. However,
CRISIL Research believes that these moves will not
bring down the subsidy burden significantly or will be
difficult to implement.

Moreover, other vehicles like trucks and buses, which
consume more diesel, remain untaxed. Of the total
diesel consumed in 2011-12, cars & UVs used up only
12 per cent, a third of what trucks and buses
consumed. (CRISIL Research has derived the share of
diesel use by cars & UVs, based on an estimated
population of 3.6 million diesel cars in India as of March
2012. This formed about 23 per cent of the total
population of cars and utility vehicles. Of this, we have
6%
22%
32%
23%
0%
5%
10%
15%
20%
25%
30%
35%
-
500
1,000
1,500
2,000
2,500
2005-06 2010-11 2011-12 2012-13B
Other govt subsidy
Petroleum subsidy
Proportion of petroleum subsidy to total subsidy (%) (RHS)
(Rs billion)
Opinion
Will additional taxes on diesel cars &
UVs help reduce petroleum subsidies?

2

CRISIL CRB Customised Research Bulletin
estimated that 47 per cent of the cars are for personal
use, and the remainder, for commercial use.)

Diesel consumption mix (2011-12E)

Source: CRISIL Research

In the following two paragraphs, we have presented our
analysis of the options being discussed by the
government:

Collections from a one-time tax (estimated at Rs
90,000-Rs 140,000 per car depending on fuel and
vehicle use) on all new diesel cars and UVs sold would
almost equal the subsidy borne by the government over
the life of the vehicle. This tax would form 16-20 per
cent of a typical diesel car's price. However, since such
a one-time tax would be levied on only new vehicle
sales, the government will be able to collect only Rs 58-
60 billion annually, which forms only 12-15 per cent of
the total diesel subsidy bill (estimated for 2011-12).
Secondly, as the life, mileage and distance travelled
would be different for personal-use and commercial-use
cars and utility vehicles; levying a common tax would be
difficult.

An annual usage-based tax on all diesel cars and UVs
would, as per our estimates, amount to an additional 2
per cent of the vehicle price annually for personal-use
cars and 5 per cent for commercial-use cars. However,
for collecting an annual tax, the government would have
to rely on RTOs, which are fragmented and not so well-
equipped. Thus, it would be difficult to collect taxes
regularly and monitor non-payments, which renders this
option unviable too. Moreover, Indian car and utility
vehicle buyers already pay 26-30 per cent of the
vehicle's retail price as tax, as compared to a 16-20 per
cent tax in Korea and Germany and an 8-12 per cent
tax in Japan (excluding scrappage and carbon tax,
which are annual in nature). Additional taxes on cars &
UVs would, therefore, only burden consumers further.

Deregulating diesel prices - the only long-term
solution to cut subsidy burden
Earlier, the government has hiked diesel prices
sparingly due to fears of high inflation, lower GDP
growth and political compulsions; despite the logic of
keeping diesel prices regulated, even as subsides kept
mounting being questioned. Globally too, petrol and
diesel prices do not vary much. In most countries within
the EU and in the US, diesel and petrol prices are
similar the difference between the two is not more
than 15 per cent. By contrast, in India today, petrol
prices are close to 1.4 times (as of September 2012)
higher than diesel, reflecting both higher subsidies on
diesel and higher taxes on petrol. (Taxes on petrol in
India are at about 45 per cent of the selling price as
compared to less than 20 per cent on diesel).

CRISIL Research believes that deregulation and
ensuring that diesel prices move in line with crude oil
prices would be the only way to bring about a
sustainable reduction in the subsidy burden, which will
also provide the government funds for other
development activities. Discouraging diesel
consumption by imposing additional taxes on private
and luxury diesel vehicles would only help in reduction
of petroleum subsidies marginally.

(Please note that the views expressed here are those of CRISIL
Research and not of CRISIL's Ratings division. CRISIL Research
operates independently of and does not have access to information
obtained by CRISIL's Ratings Division.)
Agriculture,
18
Industry,
5
Railways,
3
Others,
26
Cars & Uvs
(Personal),
7
Cars & UVs
(Commercial)
19
Trucks
and buses,
74
Roads,
48
(per cent)

3
Mr. Manoj Mohta, Director Customised Research,
currently oversees a team of analysts, who cover the
auto, metals, commodities, logistics sectors and nearly
17 micro-sectors.

Manoj played a key role in setting up the customised
research vertical of CRISIL Research. This business
offers focused solutions, aimed at addressing specific
client needs, which would help them in making better
decisions in areas of investments, planning and market
expansion. Since its inception, the customised research
business has grown rapidly, both in size and stature.

Manoj has been actively involved in conceptualisation
of three major reports of CRISIL Research -- on the
logistics sector, the capex investment cycle of Indian
corporates and the financial services market. He joined
CRISIL Research in 2006, as Head- Industry Research.
In his earlier role, Manoj was responsible for
researching and providing opinion on various sectors
including telecom, banking, pharma and information
technology. He has close to a decade's experience in
the research domain.

Manoj has a Bachelor's degree in Engineering from the
Indian Institute of Technology (IIT), Roorkee and has
done his Master's in Business Administration (MBA)
from the Northeastern University, Boston in the United
States.

How is the automobile industry expected to
perform in the near term?
The economic environment is weak and most
automobile segments are seeing moderation in demand
growth.

In 2012-13, overall passenger vehicles would see only
a marginal growth of 8-10 per cent due to low income
levels, weak sentiments coupled with higher fuel and













interest costs. However, diesel dominant segments like
sedans and Utility vehicles will grow rapidly as they are
gaining preference among customers due to the huge
price difference between the petrol and diesel variants
along with new model options.

Also, as there is slowdown in investments, stagnancy in
industrial production and weak agricultural production,
we expect growth in medium and heavy goods CVs to
decline by 1214 per cent. However, the
underpenetrated Light CVs segment would continue its
growth trajectory albeit at a slower pace of 14-16 per
cent in 2012-13.

What is the relationship between economic
cycles and various vehicle segments of the
Indian automobile industry?
The growth in the Indian automobile industry is strongly
linked with the growth in the economy. Hence, vehicle
growth reacts sharply to economic cycles.

The growth in passenger vehicles and two-wheelers is
largely driven by factors linked to consumption factors
of the domestic economy, while global factors have a
relatively lesser role to play. Passenger vehicles sales
in India is driven by income growth, cost of ownership,
Interview
Mr. Manoj Mohta
Director, Customised Research



4

CRISIL CRB Customised Research Bulletin
rising affordability and favourable income
demographics. While rising income levels is directly
linked to ndia's GDP growth, cost of ownership which
includes cost of fuel, EMIs paid, and vehicle price is
linked to global commodity prices (crude, metals, rubber
etc.) and domestic policy rates.

In contrast, the growth in commercial vehicles is driven
by factors intrinsic to the Indian economy. The sale of
heavy commercial vehicles is linked to increasing
industrial and agricultural activity, while that of smaller
vehicles is largely linked to consumption demand.
Further, in view of the uncertainty in economic
conditions and risk to industrial growth, we are
witnessing volatility in the commercial vehicle sector.

What is the position of the Indian automobile
Industry in global markets at present?
India is emerging as one of the fastest growing
automobile markets globally; leading to rising
importance of India in the growth plans of all global
manufacturers, who are seeing stagnation in developed
economies. While the last decade belonged to the
global passenger vehicle entering India, this decade
would belong to commercial vehicles.

Although India contributes only ~4 per cent to the
annual global passenger vehicle sales, all major global
players, who entered the Indian market over the last
decade, are looking at healthy volumes growth due to
the large population base and high economic growth.
While a decade ago, global manufacturers used to
launch old generation products in India, with the
increasing acceptance of international models, now
most of the launches in the country are concurrent with
launches world-wide.

In contrast, global commercial vehicle manufacturers
have either kept away or limited their presence in India
till date. This is mainly due to the huge difference in the
products offered by global manufacturers and the needs
of the Indian market. The Indian truck segment focuses
more on price rather than on safety, leading to low cost
products with lower power, limited safety and comfort
features. Whereas, products offered by global
manufacturers are expensive with high end safety
features. Going forward, we would see these gaps
being bridged with Indian customers upgrading their
requirements. Further, global manufacturers will
develop products to suit the Indian markets. Over the
next decade, we will see competition intensifying as
international manufacturers will increase their presence
in India.

What challenges/concerns do you foresee for
Indian automobile manufacturers over the next
decade?
The Indian automobile industry will continue to grapple
with uncertainties on economic growth; policy actions
on emission norms, fuel subsidy, vehicle age and fuel
efficiency norms for some time to come. Moreover,
Indian manufacturers would also face the heat of
competition. With rising competition, manufacturers
would be forced to increase product launches which in
turn will increase the development and marketing costs
and consequently exert pressure on profitability.

Further, it would become imperative to tap newer
growth avenues such as rural India. This would mean
developing products suitable to the needs of rural India
with features that provide value to them. It is also a
must to offer them at attractive prices. This would entail
significant commitment and investment in product
innovation and development. This is the only way to
grow over the next decade.






5

Indian Economy
Economic Overview October 2012



Macroeconomic Indicators - Forecast

Inflation Industrial production growth Currency
Sectoral inflation Trade Growth
Interest rates
Foreign inflow (US$ bn) Credit growth
Medium Threat High Threat
-8
-4
0
4
8
Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Mfg
40
45
50
55
60
Sep-11 Jan-12 May-12 Sep-12
Avg Rs per US$
-40
0
40
80
Aug-11 Dec-11 Apr-12 Aug-12
Exports Imports
6
7
8
9
10
S
e
p
-
1
1
N
o
v
-
1
1
J
a
n
-
1
2
M
a
r
-
1
2
M
a
y
-
1
2
J
u
l
-
1
2
S
e
p
-
1
2
1 Yr 10 Yr
-2
2
6
10
S
e
p
-
1
1
N
o
v
-
1
1
J
a
n
-
1
2
M
a
r
-
1
2
M
a
y
-
1
2
J
u
l
-
1
2
S
e
p
-
1
2
FDI+ECBs Net FII flows
0
10
20
30
S
e
p
-
1
0
J
a
n
-
1
1
M
a
y
-
1
1
S
e
p
-
1
1
J
a
n
-
1
2
M
a
y
-
1
2
S
e
p
-
1
2
0
10
20
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
Primay
Fuel
Manufacturing
-2
8
18
Aug-11 Dec-11 Apr-12 Aug-12
WPI CPI-IW
2012-13 Rationale
Growth Agriculture 0.0
Industry 3.6
Services 7.6
Total 5.5
Inf lation WPI - Average 8.0
WPI inf lation f orecast ref lects (i) higher-than-anticipated increase in f ood inf lation due to weak
and delayed monsoons af f ecting f ood supply (ii) the impact of a weak rupee which will keep the
imported component of inf lation high. Though lower GDP growth could reduce demand-side
pressures on inf lation, other pressure points like recent revisions in prices of electricity , diesel
and LPG will keep overall inf lation high.
Fiscal def icit as a % of GDP 6.2
A lower GDP growth would also lower the government revenue and push the f iscal def icit to
6.2 per cent of GDP. Our f iscal def icit f orecast does not take into account any substantial
stimulus that may be given to the economy to boost growth.
Interest rate
10- year G-Sec
(year end)
8.0-8.2
Given the high f iscal def icit, government borrowing in 2012-13 will remain high. As a result, the
pressure on the 10-year G-sec yield would continue and we expect the yield to settle around
8.0-8.2 per cent by March-end 2013. This assumes a f urther repo rate cut of around 50 bps by
the RBI during the rest of the f iscal year.
Exchange
rate
Re/US $
(year end)
53.0
Despite the recent appreciation, the rupee is expected to settle around 53 per US$ by March-
2013 due to a weak global and domestic growth outlook. However, recent policy measures
such as relaxation of FDI limits has increased capital inf lows and creates an upside bias to our
currency f orecast.
The growth f orecast takes into account two key risks: (i) delayed monsoons af f ecting
agricultural growth (ii) recession in Euro zone. Though monsoons recovered signif icantly in
August, the sowing of kharif f oodgrain is still down by around 10 per cent compared to the last
year. A deepening recession in the Eurozone will impact India's manuf acturing as well service
sector such as IT/ITES via export-linkages. Our f orecasts do not account f or any substantial
f iscal stimulus given the limited legroom available to do so. There could be some upside to the
growth f orecast if the government speeds up project clearances and restores expansion of
mining output.

6

CRISIL CRB Customised Research Bulletin
Industry Overview Cars and UV
Car sales to witness another year of low
growth
Domestic Cars and UV sales grew by 4.7 per cent in
2011-12, of which, car sales grew by a mere 2.2 per
cent, weighed down by the increase in fuel prices and
interest rates. Production troubles at Maruti Suzuki
India Ltd (MSIL), caused by labour strikes, hampered
sales further. MSIL accounted for 36 per cent of the
total production in 2011-12 as against 43 per cent in
2010-11. The UV segment grew by a healthy 14 per
cent in 2011-12 even as domestic car sales registered a
modest growth due to higher sales of new models and
models with higher diesel engine capacities.

Of the existing demand, there was a huge shift towards
diesel cars, as the gap between the prices of petrol and
diesel widened. However, carmakers were unable to
address this sudden spurt in demand as availability of
diesel engines was limited. This, in turn, impacted
growth in sales. OEMs also had to deal with a rising
inventory of petrol models despite offering huge
discounts on them.

Domestic sales: Utility vehicles (including vans)

Source: SIAM, CRISIL Research


Domestic cars, UV sales to record slow growth
in 2012-13
CRISIL Research expects 8-10 per cent growth in the
passenger vehicles segment, with utility vehicles
growing by 19-21 per cent versus a 5-7 per cent growth
in cars. Within cars, we expect lower sensitivity to
interest rates coupled with higher availability of diesel
models to lead to a double-digit growth in sedan sales.
However, small car sales are likely to grow by a modest
2-4 per cent. Going ahead, production woes at Maruti's
Manesar plant and fuel prices remain key monitorables.

Production troubles to impact growth
Domestic car sales grew by a mere 2 per cent in 2011-
12 due to production troubles at MSIL in addition to a
sharp increase in petrol prices and auto lending rates.
Hence, in 2012-13, we had projected growth to revive
on account of last year's low base. However, a lockout
at MSIL's Manesar plant in July 2012 is expected to
lead to lower growth. MSIL's Manesar plant produces
the new Swift, Dzire, Ritz, A-Star and SX4, which
constituted nearly 25 per cent of total domestic sales in
Q1 2012-13. These models recorded a growth of more
than 50 per cent in the first quarter of 2012-13, while
the industry grew by 5 per cent during the period.
Hence, unavailability of these models will have a
significant impact on demand.

Exports to grow by 12-14 per cent in 2012-13
Exports of cars & utility vehicles (UVs) are expected to
grow by 12-14 per cent in 2012-13 after rising by 14 per
cent in 2011-12. Last year, new entrants like Nissan
and Ford led the growth, as exports of their small-car
models surged. On the contrary, exports by Maruti
Suzuki India Limited (MSIL), the country's second-
largest exporter, declined by 7.9 per cent, as production
suffered in line with strikes at its key plants. This pulled
344
332
423 530 602
13.6%
-3.7%
27.4%
25.3%
13.6%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
700
2007-08 2008-09 2009-10 2010-11 2011-12
T
h
o
u
s
a
n
d
s
Utility vehicles Growth (%)

7
down the carmaker's share in total exports to 25 per
cent in 2011-12 from 33 per cent in 2009-10. Others like
Hyundai Motors India Limited (HMIL) also increased
focus on export markets to compensate for slow
domestic demand.

OEMs other than current leading exporters will rapidly
gain share in total exports from the country. In the long
term, forays into markets other than Europe will drive
exports. Additionally, export-focused capacity additions
by players such as Renault-Nissan, Ford and Maruti
Suzuki will also aid growth, over the long term.





























Cars & UV Exports

Source: SIAM, CRISIL Research
























6%
9%
55%
33%
0%
14%
-10%
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
T
h
o
u
s
a
n
d
s
Export volumes Growth (%)

8

CRISIL CRB Customised Research Bulletin
Industry Overview

Commercial Vehicle

Global, regional comparisons reveal untapped
potential in LCVs
The sub-one tonne segment was created with the
launch of Tata Ace in 2005, which changed the
dynamics of the entire LCV segment. Earlier, this class
of vehicles along with pick-ups was termed as small
commercial vehicles (SCVs). SCV sales surged
between 2004-05 and 2011-12, driving a 22 per cent
CAGR in LCV sales during the period. Hub and spoke
proliferation, growth in organised retail and substitution
of large three-wheelers by SCVs, aided this growth.
CRISIL Research believes that the LCV growth story
will continue in the long term. A study of LCV markets
across India and a comparison with China indicates that
domestic LCV sales would continue growing at a 14-16
per cent CAGR during 2011-12 to 2016-17. This growth
potential will attract more players into the Indian LCV
market, thereby intensifying competition.

LCV growth story to remain intact
CRISIL Research expects LCV sales to continue to
grow in double digits during 2011-12 to 2016-17, driven
by a strong rise in small commercial vehicle (SCV)
sales. SCVs have long driven the growth in LCV sales,
since the launch of the Tata Ace in 2005. The Ace
exploited the vacant space between three-wheelers and
upper-end LCVs and created a new segment known as
mini-trucks or sub-one tonne vehicles. These vehicles
that have a payload of less than one tonne, together
with pick-ups, form the SCV segment. SCVs are now
estimated to form more than three-fourths of the total
LCV population in the country as compared to less than
half in 2004-05.

The significance of SCVs is also reflected in the fact
that until their coming on scene, LCV sales volume
growth had been almost sedatetrending at about 7
per cent between 1990-91 and 2004-05 - due to the
absence of suitable vehicles for last-mile distribution. By
contrast, LCV sales more than quadrupled at a 22 per
cent CAGR over 2004-05 to 2011-12, driven by a 31
per cent growth in SCV sales.

SCVs lead action in LCV space

Source: CRISIL Research

The following factors helped SCVs grow in the past 5
years: i) proliferation of the hub and spoke model, ii)
rising private consumption expenditure and iii)
substitution of large three-wheelers. SCVs also created
a new customer class: first-time users and drivers-
turned entrepreneurs, who turned vehicle owners as
opposed to hiring vehicles in the past.

Substitution of large three-wheelers by SCVs is
estimated to have contributed to a fourth of total LCV
sales, till date. SCVs have almost replaced large three-
wheelers, as a higher loading capacity, ability to travel
longer routes and better cost economics made SCVs
preferable.

In the next 5 years too, LCV sales are expected to
continue to grow in double digits. Besides the factors
discussed above, growth will also be aided by
4% 12%
21%
27%
33%
40%
46% 35%
36%
36%
36%
36%
34%
33%
61%
52%
43%
36%
31%
26%
22%
0%
40%
80%
120%
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
Sub-one tonne Pick-up Upper-end LCV
Tata Ace launched

9
replacement demand and substitution of small-three-
wheelers to an extent. We expect replacement demand
for sub-one tonne vehicles, which were sold since
2005-06, to set in over this period. Similarly, though the
substitution effect from large three-wheelers will fade,
aggressive marketing of 0.5-tonne payload SCVs will
substitute small-three wheelers to an extent, aiding LCV
sales.

CRISIL Research thus expects LCV sales to post a 14-
16 per cent CAGR during 2011-12 to 2016-17, led by a
15-17 per cent CAGR in SCV sales. The growth
potential of the Indian LCV market remains huge as
compared to global peers such as China. Our study
reveals that as of 2011-12, ndia's LCV: MHCV ratio
was half that of China's 1.8 times. This indicates
significant scope for volume growth in the Indian LCV
market over the next 5-7 years. ndia's LCV: MHCV
ratio is expected to improve to 1.25 times by 2016-17.

Further, a comparison of LCV penetration across Indian
states in our study - LCVs-Growth story continues -
revealed that there is a huge volume growth potential.
CRISIL Research also found that factors like: size of
state GDP, private consumption expenditure, urban
population and MHCV population are the key factors
determining the potential for SCVs in a state.

Southern states account for a third of LCV sales

Source: Industry, CRISIL Research

Volume growth potential makes Indian LCV
market attractive, even as competition
intensifies
As the potential is immense, more players are expected
to enter the Indian LCV market in the coming years,
intensifying competition further. For instance, Mahindra
& Mahindra's (M&M's) Maxximo, launched in 2010-11,
is already estimated to have over 10 per cent market
share. The Maxximo addressed the need for higher-
powered SCVs. Ashok-Leyland Nissan's Dost, which
combines features of both mini-trucks and pick-ups, has
also gained over 5 per cent share. For example,
Chinese truck makers Beiqi Foton and GM-SAIC are
expected to launch models from their famous Forland
and Wuling ranges. As a result, players will have to
constantly innovate and offer value-for-money to stay
competitive. Nevertheless, the volume growth potential
of the Indian LCV market will ensure that most players
will stay in for the long haul.










33-37%
31-35%
28-32% 30-34%
18-22%
18-22%
13-17% 13-17%
2008-09 2011-12
South Zone West Zone North Zone East Zone

10

CRISIL CRB Customised Research Bulletin
Industry Overview

Two-wheeler
Weakening macro-economic cues to weigh
down growth during 2012-13
The domestic two-wheeler industry grew by 27 per cent
in 2010-11 y-o-y, with domestic volumes rising by 26
per cent and exports by 35 per cent. In 2011-12, while
rural demand remained buoyant, urban motorcycle
demand decelerated. Consequently, domestic two-
wheeler sales growth moderated to 14.1 per cent during
the year. Exports growth remained significantly higher
during 2011-12 at 27 per cent.

In 2012-13, domestic sales are forecast to grow by just
5-7 per cent. Deficient and delayed rainfall in major
Indian states is likely to hit rural incomes, and, in turn,
affect demand for motorcycles and mopeds, categories
that account for over 80 per cent of two-wheeler sales.

Exports remained strong in 2011-12 despite
DEPB withdrawal
Two-wheeler exports grew at a robust pace of 27.1 per
cent in 2011-12 (after a strong 35 per cent growth in
2010-11) due to healthy growth in target markets, better
products and the increasing distribution reach of Indian
players. During the year, Bajaj Auto Ltd was the
country's leading exporter, with the company's exports
growing by 30.4 per cent y-o-y. TVS Motors Ltd, the
second largest exporter, posted a 14.6 per cent y-o-y
exports growth. Amongst newer players, the exports of
India Yamaha Motors grew by over 45 per cent y-o-y
following the company's ramp up in production.

This sharp increase in two-wheeler exports is despite
the withdrawal of the Duty Entitlement Passbook
(DEPB) Scheme in September 2011, under which
around 9 per cent of free-on-board (FoB) value of
exported two-wheelers was reimbursed to exporters as
duty credit in the form of tradable scrips. The DEPB
scheme has been replaced with a Duty Drawback
Scheme (effective since October 2011), offering 5.5 per
cent incentive on FoB value with an additional 1 per
cent special incentive for exports in 2011-12. Moreover,
a Special Focus Market scheme (wherein 3.5 per cent
benefit is made available to exports destined for certain
distant markets) was expanded to include 41 new
countries. Important existing and emerging markets
such as Angola and several other African countries,
Colombia, Mexico and Peru are covered under the
scheme.

Thus, for most major export markets, the level of
incentives available remains largely unchanged in the
post-DEPB era with the major exceptions of Nigeria, Sri
Lanka and Bangladesh. However, exporters were also
able to pass-through 2.0-2.5 per cent price hikes post-
September 2011 in all major export markets and thus
make up for reduced incentives without a significant
dent on volumes. For the period April-September 2011,
exports grew by 32 per cent y-o-y whereas growth for
October-December 2011 was at 22 per cent y-o-y,
clearly showing continued healthy growth.

Two-wheeler exports

Source: SIAM, CRISIL Research

21%
32%
22%
14%
34%
27%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
500
1000
1500
2000
2500
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
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9
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-
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T
h
o
u
s
a
n
d
s
Export Volumes Growth (%)

11
Industry Overview

Auto components

Weak demand from OEMs drags domestic auto
component growth in 2011-12
In 2011-12, domestic auto component production
growth slowed to 15 per cent y-o-y after posting a
strong growth the year before, reflecting a slower
demand from the OEM segment (70 per cent of
component demand), as cars & utility vehicle (UV) sales
grew in single digits. Growth in other end-user
segments, such as commercial vehicles also
moderated. Slowing car production also restricted the
growth in realisations for component manufacturers.

In 2010-11, growth was better, with auto component
production estimated to have risen to 28 per cent y-o-y,
driven by a sharp recovery in domestic automobile
production after slowing in 2007-08 and 2008-09.

Slowing OEM demand to weigh down
component production growth
CRISIL Research expects the Indian auto components
industry to grow at 12-14 per cent y-o-y to reach Rs 2.4
trillion in 2012-13. Growth would however be lower than
in the past years, as commercial vehicle (CV)
manufacturers, who contribute to a fifth of the total
domestic component demand, report a slow growth.
The long-term picture remains bright, with the industry
expected to record a 15-17 per cent CAGR to reach Rs
4.5 trillion by 2016-17.

Component exports continued to gain
momentum in 2011-12
In sharp contrast to the domestic scene, auto
component exports is estimated to have continued to
remain robust in 2011-12, growing by 25-27 per cent in
value terms, after having grown by 28 per cent in 2010-
11. A recovery in key markets, growing penetration of
Indian auto component manufacturers and the trend of
increased sourcing by global OEMs from low-cost
countries boosted exports.

The EU and the US accounted for about 65 per cent of
auto component exports in 2011-12. Sales of cars and
light trucks, which are the major target segments for
Indian auto component players, continued to grow at 13
per cent during the year, after growing by 11 per cent in
2011 in US. However, in the EU, car registrations
continued to slide by 2 per cent in 2011, as
governments in the region withdrew incentives like
scrappage benefits on small cars. The EU commercial
vehicles market (a major target segment for Indian auto
component exporters), however, continued to be strong,
growing by 13 per cent in 2011.

Trend in yearly export growth of auto components

Source: CRISIL Research, ACMA

Increased penetration, expected recovery in
key markets to lead to strong growth in
exports
Auto component exports have grown rapidly over the
last decade. The share of exports in total auto
component production increased to 14 per cent in 2010-
11 from 8 per cent in 1999-2000. This is because,
globally, there has been a shift in auto component
sourcing towards low-cost countries (LCCs). Also, while
34
16
19
20
34
44
-3
33
59
30
44
19
9
19
7
28
1
9
9
5
-
9
6
1
9
9
6
-
9
7
1
9
9
7
-
9
8
1
9
9
8
-
9
9
1
9
9
9
-
0
0
2
0
0
0
-
0
1
2
0
0
1
-
0
2
2
0
0
2
-
0
3
2
0
0
3
-
0
4
2
0
0
4
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0
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2
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0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
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0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
(per cent)

12

CRISIL CRB Customised Research Bulletin
India exported around 35 per cent of its total auto
component exports to OEMs or Tier-I suppliers in 2000,
supplies to original equipment manufacturers (OEMs)
and Tier I vendors was pegged at 80 per cent as of
2010. This indicates that there is increasing
dependence of global players on Indian component
manufacturers. Hence, auto component export volumes
from India will continue to grow.

Exports are expected to post a CAGR of 22-24 per cent
till 2016-17 as exports to target markets increase,
supported by a growth in outsourcing requirements of
global automobile manufacturers.

13













Hero MotoCorp's Q1FY13 earnings were in line with CRSL Research's
expectations. Revenues increased 4% q-o-q to Rs 62 bn driven by 4% volume
growth. Realisations remained flat. EBITDA margin declined by 34 bps q-o-q to
15%. Adjusted PAT margin declined by 15 bps to 9.9% due to decrease in EBITDA
margin. Adjusted PAT was Rs 6.2 bn, up by 2% q-o-q. Although competition has
intensified in the two-wheeler segment, we remain positive on the company due to
its market leadership, strong presence in rural markets and strong brand recall. We
maintain the fundamental grade of 5/5, indicating that its fundamentals are
excellent relative to other listed securities in India.

Competition intensifies but annual volume guidance unchanged
Hero MotoCorp's volume increased by 7.5% y-o-y to 1.64 mn units during
Q1. The company increased its market share marginally in the motorcycle
segment but underperformance in the scooter segment led to lower growth
than the industry's 9% y-o-y. Exports constituted ~3% of total revenues.
Despite stiff competition from Honda in two wheelers market share is up by
250 bps over eight quarters Hero MotoCorp has maintained its market
share. Players like Bajaj Auto, TVS Motors and Yamaha have reported a
decline in share over the same period.
Management maintains its annual volume growth guidance of 10%. While the
motorcycle segment is performing well, incremental volumes are expected to
come from the launch of a new scooter - Maestro.

Inventory pile-up at dealer level
Inventory at the dealer level has doubled from the historical two weeks to four
weeks due to softening of demand. Given that the rural region accounts for ~46%
of sales, we believe that monsoon is a key monitorable. We maintain 11.6% volume
growth for FY13, lower than 15.4% in FY12.

Significant capacity expansion plan announced
Hero MotoCorp has announced plans to invest Rs 25 bn over the next two years. It
includes setting up a plant in Gujarat at a cost of Rs 11 bn, a plant in Rajasthan at
Rs 4 bn and a R&D facility in Rajasthan for Rs 4 bn. The expansion will enhance
capacity by 2.2 mn units to 9 mn units by March 2014.

Maintain earnings estimates and fair value of Rs 2,023
We maintain our earnings estimates because we expect volume to pick up during
the festive season (October onwards), which will result in operating efficiencies
and, hence, better margins. We continue to use the discounted cash flow method to
value Hero MotoCorp and maintain the fair value at Rs 2,023 per share. At the
current market price of Rs 2,082, the valuation grade is 3/5.


(Rsmn) FY10 FY11 FY12# FY13E FY14E
Operating income 164,276 197,302 235,790 271,203 310,232
EBITDA 27,777 26,386 36,188 41,440 46,307
Adj Net income 22,345 20,084 23,781 27,431 30,026
Adj EPS-Rs 111.9 100.6 119.1 137.4 150.4
EPS growth (%) 72.7 -10.1 18.4 15.3 9.5
Dividend Yield (%) 6.2 5.8 2.5 2.9 3.2
RoCE (%) 69.8 68.6 69.3 59.0 51.6
RoE (%) 61.5 62.6 65.6 54.3 45.1
PE(x) 18.7 20.8 17.5 15.2 13.9
P/BV (x) 12.0 14.1 9.7 7.2 5.6
EV/EBITDA (x) 13.2 14.1 10.4 8.8 7.4
NM: Not meaningf ul; CMP:Current market price;# abridged f inancials
Source: Company, CRISIL Research Estimates
CFV matrix





Shareholding pattern



Performance vis--vis market


1 2 3 4 5
1
2
3
4
5
Valuation Grade
F
u
n
d
a
m
e
n
t
a
l

G
r
a
d
e
Poor
Fundamentals
Excellent
Fundamentals
S
t
r
o
n
g
D
o
w
n
s
S
t
r
o
n
g
U
p
s
i
d
e
Key stock statistics
Nifty/Sensex 5205/17158
NSE/BSE ticker HEROMOTOCO
Face Value (Rs per share) 2
Shares outstanding (mn) 199.7
Market cap (Rs mn)/(USD mn) 417,113/7,532
Enterprise value (Rs mn) 416,345/7,518
52-week range (Rs) (H/L) 2,279/1,704
Beta 0.4
Free float (%) 47.8%
Avg daily volumes (30-days) 358,281
Avg daily value (30-days) (Rs mn) 736.3
52.2% 52.2% 52.2% 52.2%
34.8% 33.8% 33.4% 33.2%
4.2% 5.4% 5.6% 5.9%
8.8% 8.7% 8.8% 8.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sep-11 Dec-11 Mar-12 Jun-12
Promoter FII DII Others
1-m 3-m 6-m 12-m
Hero Motocorp 2% -5% 7% 19%
NIFTY 2% -2% 3% -7%
Returns
Independent Equity Research Report
Hero MotoCorp Ltd
July 20, 2012

14

CRISIL CRB Customised Research Bulletin















































Customised Research Services Automobiles
Coverage



Key Offerings

Forecasting
Automobile forecasting/statistical tool development services
Short term demand and supply forecasts based on econometric models
Medium-to-long term demand and supply forecasts model for strategic planning activities
Market entry strategy and business planning support
Market assessment and outlook of auto components and tyre business in India
Demand potential for alternative fuel vehicles
Commodity prices for key raw materials like metals, rubber and polymer

Market dynamics
Market size, characteristics, structure, dynamics and profitability of the used vehicle segments
Competitive benchmarking studies based on:
Product portfolio, distribution network and marketing strategies for new and existing products
Supply chain and sourcing strategy of OEMs
Financial parameters, growth trends, export potential etc of industries/companies
Cost-structure and operational efficiency of an OEM vis--vis other OEMs
Impact analysis of developments concerning auto fuels, economic indicators and raw material prices

Financing options
Benchmarking of independent auto financiers with their competitors
Financial assessment of vendors

15















































Media Coverage






16

CRISIL CRB Customised Research Bulletin






























NOTES
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experience
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