Demand uptick, change in demographics aiding auto growth: Citi

Combination of pick-up in demand as well as inceptive up trading in the market is happening in the automobile sector today, says Jamshed Dadabhoy of Citi adding that there is a clear shift in consumer choice to premiumisation.Agreeing to the view, RC Bhargava, Chairman of Maruti Suzuki too says that demographics are changing now. “Youngsters are willing to pay more for up-market kind of cars today,” he says.Market for cars has been expanding and will continue to expand in coming time. Maruti is aiming to increase its market share from 1.5 million to 2 million cars by 2022, Bhargava says. The company is continously working on improving product quality and performance to deal with growing competition in the sector. According to Dadabhoy, monsoon will be the key trigger for revival of rural economy, which will help rural-centric companies. His top two picks in the sector are Mahindra & Mahindra and Tata Motors. Amongst auto ancillaries, he recommends Exide Industries and Bharat Forge.Below is the verbatim transcript of Jamshed Dadabhoy & RC Bhargava’s interview with Sonia Shenoy on CNBC-TV18.Q: What is the long-term view on the auto sector?Dadabhoy: We are generally fairly constructive on the auto sector as a whole. We have a decided bias, I would say for the four-wheeler names over the two-wheeler names. So, our top buys in the space would be Mahindra & Mahindra (M&M), Tata Motors, Maruti Suzuki, Ashok Leyland. In two-wheelers we like Eicher Motors for the Royal Enfield franchise, so yes I think generally we are fairly positive on the sector.Q: In the last couple of months the standout feature of the auto sector is that the new launches have done very well. Whether it is the Vitara Brezza, whether it is the Baleno, whether it is the Mahindra KUV 100 for M&M. Do you think there is genuine demand pick up or is it only the companies who are coming out with new launches that are doing well?Dadabhoy: I think it is a combination of both. There is a genuine pickup in demand. There is also an incipient uptrading which is happening in the sector as a whole. This uptrading is not something which is happening just in the passenger vehicle or four-wheeler space it is happening across the consumer sector as a whole. So, call it premiumisation, call it uptrading and call it moving up the value chain the Indian consumer is definitely moving away from what his parents or grandparents were used to. You think about the demographics of the first time buyer; a first time buyer is typically someone who was born probably somewhere in the early to mid 90’s, the millennials. These guys have never experienced what it is to grow up in an environment where there was just black and white television and just two TV channels. So, their preferences, their taste, their behaviours are going to play a much greater role over the next 5-410 years because their percent of the total working population is only increasing dramatically.Q: The thrust on premium products that Maruti had undertaken about a year back is paying off beautifully now whether it is the Vitara Brezza, whether it is the Baleno, whether it is the Ciaz. In fact Ciaz has over taken Honda City as well in that segment to become a market leader. What have you made of how demographics are changing and would Maruti continue to broaden its premiumisation strategy in the years to come?Bhargava: No, there is no doubt that there is a change in the demographics and the kind of products the younger generation is now wanting to buy. However, at the same time you remember that the total market for cars in India has begun to expand and we expect this growth to continue over the next several years. Our own target is to move up from about 1.5 million cars to 2 million cars by 2022 at the latest. When this kind of growth takes place, this growth will take place in all the segments. There were some segments in which Maruti Suzuki was weak or not present earlier. For example, our earlier attempts at having a car which would compete at the level at which the Honda City was settling have not been so successful. Over time we have learnt our lessons and moved up the product quality, the product performance, so that we are now as competitive as anybody else. In the hatchback sector, we have found that there was a great requirement of the younger generation to have a product which was more packed with modern technology and electronics than earlier products. They are willing to pay the price because they want to feel that they are driving a very up market kind of car. Therefore our designers have been working on that level. The Brezza of course is the outcome of the fact that we were absent in the SUV sector and this is our first attempt to get into the SUV sector. Q: I know you have given the overall volume growth for Maruti at about 10 percent for FY17. I have tracked your company for very long and I know that you generally give out a conservative guidance. So, tell us is there a possibility of over shooting this guidance on the upside purely because of the new launches and the fact that you have filled a lot of the product gaps you had last year?Bhargava: We could possibly do better than 10 percent or would have done better than 10 percent if the manufacturing capacity was not a constraint. This year 2016-2017, we are stretching all our facilities to get even to a 10 percent growth. It is not within the conventional installed capacity. We will start getting some help from the Gujarat plant early in 2017. However, any significantly higher growth than 10 percent this year seems very unlikely in the context of this constraint. Q: Your top picks in this sector and maybe we can restrict them to your top two picks in the sector and why you like them?Dadabhoy: Top two picks in the space would definitely we Mahindra & Mahindra and Tata Motors at this point in time. The reasons why we like them are fairly simple; Mahindra & Mahindra are very rural centric business. Hopefully, after a couple of bad monsoons we should have decent rains which should help the tractor business. It should also revive sentiment in rural India. A large part of M&M UV portfolio is quite rural centric or so I would say small town from a demand perspective that is number one. Tata Motors is also something which we have liked for almost five or six years odd now. We continue to like it primarily because of the Jaguar Land Rover model cycle which remains strong. The stock is fairly cheap at this point in time. They have just reported very strong fourth quarter numbers with very strong margins. We hope that the volume and margins momentum is something which sustains over the next few quarters at least. Q: Any auto ancillaries that you like?Dadabhoy: Auto ancillaries our preferred picks at this point in time are Exide Industries and Bharat Forge.