[GTO]

The infrastructure might already be used beyond its capacity, but customer demand remains.

Auto demand in Top-5 cities yet to peak. We analyze the trends in passenger vehicle and two-wheeler demand across India’s Top-5 cities (Bangalore, Chennai, Delhi, Mumbai and Pune) in this note. The data suggests interesting trends, which are contrary to popular perceptions. Auto demand in the Top-5 cities has grown in line with or slightly higher than the national average in the automobile industry despite penetration being 2-5X that of rest of India, which highlights that penetration of automobiles has not yet peaked in India’s Top-5 cities.

Analyzing PV and two-wheeler registration data across Top-5 cities in India

} Penetration of passenger vehicles in Top-5 cities (Refer to Exhibit 1) is 5X that of rest of India. The growth rate of passenger vehicles in Top-5 cities over the last five years (FY2013-18 period) has mirrored PV industry growth across India (4.4% CAGR). Delhi has the highest penetration of PVs across cities in India (98 PVs per 1,000 people).

} Demand for passenger vehicles declined 7% yoy in the Top-5 cities (see Exhibit 2) in FY2018 driven by 58% yoy decline in demand from the taxi segment. Excluding the taxi segment, PV industry grew by 5% yoy in FY2018 in the Top-5 cities. The share of taxi segment increased from 7.7% of PV industry volumes in Top-5 cities in FY2013 to 19% in FY2017 before declining to 8.5% in FY2018. Excluding the taxi segment, PV industry in Top-5 cities grew at a CAGR of 4.2%, which is in line with industry growth. We believe the penetration of PVs is yet to peak in Top-5 cities but in the medium term, demand growth will be driven by capacity addition by the taxi segment (Uber/Ola etc.) in these cities.

} Penetration of two-wheelers in Top-5 cities (see Exhibit 1) is 2X that of rest of India. The growth rate of two-wheelers in Top-5 cities over the last five years (FY2013-18 period) has outpaced two-wheeler industry growth across India. We believe this is driven by an increase in scooter penetration in cities. As per our calculations, every household now has a two-wheeler in Top-5 cities if we assume single ownership of two-wheelers in a household. Pune and Chennai have the highest penetration of two-wheelers in India.

} Demand for two-wheelers grew by only 4.4% yoy in FY2018 in Top- 5 cities while in rest of India demand grew by 15.8% yoy.

} We also analyzed Maruti Suzuki’s distribution presence and its market share across the top-4 states, which form 30% of all India demand for PVs and 16.5% of all India demand for two-wheelers. Maruti Suzuki has 49% market share in the Top-4 states (Delhi, Karnataka, Maharashtra and Tamil Nadu) and has increased market share in these four states by ~500 bps over the last two years.

} Maruti Suzuki has 32% share of dealerships in the Top-5 cities, while in the rest of India Maruti has a 51% share of dealerships. Maruti Suzuki has also increased its market share outside these Top-5 cities by 320 bps over the last two years.

} Hero Motocorp has lost 534 bps market share in four states (Delhi, Karnataka, Maharashtra and Tamil Nadu) and 211 bps market share in the rest of India over the last two years. Hero Motocorp also has a significantly higher distribution presence than its competitors in the two-wheeler segment but it has lost market share due to loss of market share in its scooter segment.

[V.Narayan]

Before the laments on infrastructure start let me say in the life of a nation the infrastructure eventually comes - in our case a little slower than most. Few nations if any at all, other than China, have dealt with economic change & hence demand for roads at the pace & magnitude we are. The bad news guys is that in the one plus generations it will take to effectively commission that infrastructure/public transport some of our lifetimes will get over. Housing & personal transport will grow in my view at a steady 4% to 7% for a long time. Lot of aspiring and deserving citizens out there.