In our Auto Sector Update of July 2008, we had highlighted various hurdles to the growth and demand of the Indian Auto industry.
Since the beginning of 2008, auto companies had been reeling under the pressures of high input costs (impacting their Profitability), high interest rates (affecting consumer affordability) and liquidity constraints (affecting consumer demand), all of which had collectively adversely impacted Volume Sales of the Industry.
This coincided with the global economic setback, leading to a considerable slowdown in Indian Auto exports.
Thus, dwindling domestic demand and retarded exports demand acted as a double-whammy impacting fortunes of the Indian Auto industry.
However, the industry’s fortunes have been revving up with most of the constraining factors turning around to support the recovering demand, which would in turn aid better growth going forward.
Notably, the industry witnessed a sequential surge in 4QFY2009 and 1QFY2010 supported by the boost from the stimulus packages announced by the government in December 2008 and February 2009 and declining interest rates.
FY2010 has started on a positive note for the auto sector with volumes improving every month, which has resulted in fresh buying and sharp gains in most Auto stocks in the last six months.
Overall we maintain that the long-term key demand drivers remain intact for the Sector.
Further, sub-optimal utilisation of new capacities and higher cost of operations, which were major constraining factors in FY2009, are also expected to improve sequentially going forward.
Thus, with growth visibility getting unclogged in the auto sector, it gives us immense clarity with respect to the core business performance of Auto companies, which we believe will continue to improve here onwards.
We re-iterate our positive stance on the demand outlook and expect the sector to continue to perform well over the next couple of years.