August 4th, 2007

Automobile Sector: Get set……….Long Drive!!

Summary & Highlight (Q1FY08)

9 Passenger Car volume grew 13 percent versus utility vehicles growth of 14 percent
9 Two wheelers volume decline by 9 percent
9 MHCV and LCV volume grew 7 percent
9 Sales increased by 8 percent where as PAT registered 4% growth
9 Operating margin under pressure due to volatile material cost

Latest Developments
9 Maruti Udyog Ltd (MUL) launched its sports utility vehicle Grand Vitara
9 M&M Ltd has acquired additional 20 percent stakes in Punjab Tractors Ltd through an
open offer.
9 Tata Motors Ltd has made an entry into the small capacity rural and urban passenger
transportation segment with launch of Winger, Magic. Tata Motors has earmarked an
investment of Rs120 billion for the next 3-4 years
9 Bajaj Auto launched 3 new 100CC+ vehicles since February 2007 and banking on its
DTS-i technology bikes and intends to gradually get out of the 100 cc-four stroke game

Volume Numbers
Particulars June.07 June.06 % CH Q1FY08 Q1FY07 % CH
Passenger Car 94,021 80,247 17% 275,035 243,188 13%
Utility Vehicles 25,622 22,600 13% 73,288 64,236 14%
Two Wheelers 563,855 631,687 -11% 1,736,499 1,906,275 -9%
MHCV & LCV 40,673 38,019 7% 112,763 105,660 7%
Source: CRISIL
Rising interest rate coupled with higher material cost has thrown the auto volume out of gear
in the recent times. The passenger car volume has shown better performance registering 13%
growth in Q1FY08 to 275035 units as compare to 243188 units in Q1FY07 driven by new
model launched by Maruti and Mahindra. Utility vehicles led by M&M have registered 14%
volume growth to 73288 units. Two wheelers is continued to skid in terms of volume, has
shown de-growth of 9% to 1736499 units as against 1906275 units in Q1FY07 owing to higher
interest rate, constraints on credit and tightening financing norms by banks. The commercial
vehicle segment has shown 7% moderate volume growth to 112763 units. The RBI in its
credit policy on 31st July 2007 has raised CRR by 50 bps leaving a fear of further interest rate
hike. We expects, however the over all industry to grow at healthy double digit on back of
robust economic activities, low penetration level coupled with rising household income. Going
forward, Auto Mission Plan (AMP) 2006-2016 envisaged doubling the sector’s contribution in
GDP to 10 per cent and provides additional employment to 25 million people by 2016 with a
road map to attract $40 billion investment and sectoral out put of $145 billion.

KRC RESEARCH 1
 Weekender

Aug 4th’, 2007

Background

Introduction: India is….

• Largest three wheeler market in the world

• 2nd largest two wheeler market in the world
• 4th largest passenger vehicle market in Asia
• 4th largest tractor market in the world
• 5th largest commercial vehicle market in the world

The manufacturing demography is centered at Chennai, Bangalore, Pune, NCR etc.

Component market is highly fragmented with 6% organized (75 % output value) and 94 %
unorganized.

Indian automobile industry is nearly six decades old. Until the early 1990s, the automotive
sector in India was highly protected. This was in the form of steep import tariffs and measures
that restricted the participation of foreign companies. Hindustan Motors (HM) and Premier
Automobile (PAL) that were set up in 1940's have tenanted the motor car sector by
dominating the vehicle market and industry owing to low volumes. In the 1950s, the arrival of
Tata Motors, Bajaj Auto, and Mahindra & Mahindra led to steadily increasing vehicle
production in India, while the 1960s witnessed the establishment of the two- and three-
wheeler industry in India.

Indian A uto mo bile Industry

4%
13%
4%

79%

Commercial Vehicle Passager Car 3 Wheelers 2 Wheelers

Source: SIAM

Current Scenario
Indian automobile industry continued good show in FY2006-07. The overall volume is
expanded by 14% to cross 10 million vehicles as compare to 89, 06,428 units in FY2005-06,
where as the industry registered a CAGR of 14.11% between 2001-02 to 2006-07. The
commercial vehicle is the fastest growing segment thanks to ban on overloading by Supreme
Court last year, commercial vehicle sale clocked 33% growth to 467882 units as compare to
351041 units in FY 2005-06. The passenger car segment led by Maruti registered the growth
of 21% to cross 1.3 million vehicles in FY 2006-07, where as the two wheeler segment remain
subdued up by 11% to 78,57,548 units as compare to 70,52,391 units in FY 2005-06.On the
export front the industry is doing exceptionally well. The export sales registered a growth of
25% to cross one million vehicles in a year where as the industry registered a growth of 41%
CAGR in last 5 years.

KRC RESEARCH 2
 Weekender

Aug 4th’, 2007

Automobile Domestic Sales Trends

Category 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Passenger Cars 509088 541491 696153 820179 882208 1076408
Utility Vehicles 104253 113620 146388 176360 194502 220199
MPVs 61775 52087 59555 65033 66366 83091
106157 114307
Total Passenger Vehicles 675116 707198 902096 2 6 1379698
M&HCVs 89999 115711 161395 198506 207472 275600
LCVs 56672 74971 98719 119924 143569 192282
Total Commercial Vehicles 146671 190682 260114 318430 351041 467882
Three Wheelers 200276 231529 284078 307862 359920 403909
Scooters 908268 825648 886295 922428 909051 940673
Motorcycles 2887194 3647493 4170445 4964753 5810599 6553664
Mopeds 408263 338985 307509 322584 332741 355870
Electrict Two Wheelers - - - - - 7341
420372 481212 536424 620976 705239
Total Two Wheelers 5 6 9 5 1 7857548
Grand Total 5225788 5941535 6810537 7897629 8906428 10109037

Automobile Exports Trends

2001- 2002- 2003- 2004- 2005-
Category 02 03 04 05 06 2006-07
Passenger Cars 49273 70263 125320 160670 169990 192745
Utility Vehicles 3077 1177 3049 4505 4489 4403
MPVs 815 565 922 1227 1093 1330
Total Passenger Vehicles 53165 72005 129291 166402 175572 198478
M&HCVs 4824 5638 8188 13474 14078 18838
LCVs 7046 6617 9244 16466 26522 30928
Total Commercial Vehicles 11870 12255 17432 29940 40600 49766
Three Wheelers 15462 43366 68144 66795 76881 143896
Scooters 28332 32566 53687 60699 83934 35685
Motorcycles 56880 123725 187287 277123 386054 545887
Mopeds 18971 23391 24078 28585 43181 37566
Electrict Two Wheelers - - - - - -
Total Two Wheelers 104183 179682 265052 366407 513169 619138
101127
Grand Total 184680 307308 479919 629544 806222 8

Source: SIAM

Latest Developments

Maruti Udyog Ltd (MUL) launched its sports utility vehicle Grand Vitara
Maruti SUV is back with a bang after an 18-month hiatus; Maruti Udyog declared its comeback
to the SUV passenger car segment by launching the new Grand Vitara. Priced modestly at Rs
13.8 lakh (ex-showroom, Delhi) for the manual transmission model and Rs 14.8 lakh for the
automatic transmission model, this car replaces the earlier Vitara which had a price tag of Rs
18.28 lakh (manual transmission).

KRC RESEARCH 3
 Weekender

Aug 4th’, 2007

M&M Ltd has acquired additional 20 percent stakes in Punjab Tractors Ltd through
an open offer.
Mahindra and Mahindra Ltd have increased its stake in Punjab Tractors to 64.6 per cent
following the completion of an open offer to acquire an additional 20 per cent in the company.
The acquisition has strengthened its position in farm equipment segment in North Indian
market. The combine market share stands at 41%.

Tata Motors Ltd has Made an entry into the small capacity rural and urban passenger
transportation segment with launch of Winger, Magic.

Tata Motors Made an entry into the small capacity rural and urban passenger transportation
segment with the launch of two new products. The first, a passenger version of the Tata Ace
christened Magic and the other, a maxi-van modeled on Renault panel van `Traffic' called the
Winger, While the two new vehicles are diesel products, a CNG version of the Magic will come
into the market before the end of the fiscal Magic is priced at Rs2.6lakh (ex-showroom, Pune)
where as Winger’s ex-showroom price tag ranging from Rs4.70 lakh to Rs6.55 lakh.

Tata Motors has earmarked an investment of Rs 120 billion for the next 3-4 years

Bajaj Auto launched 3 new 100CC+ vehicles since February 2007 and banking on its
DTS-i technology bikes and intends to gradually get out of the 100 cc-four stroke
game
The company is moving into the entry-level customer to DTS-I. The company is envisaged to
sell nearly 2.4 million vehicles in FY08 and export over 1 mn vehicle by 2010.

Two Wheelers

Particulars June.07 June.06 % CH Q1FY08 Q1FY07 % CH

Two Wheelers 563,855 631,687 -11% 1,736,499 1,906,275 -9%

The volume for Q1FY08 is stands at 1736499 as compare to 1906275 units in Q1FY07

World Tw ow heeler Market

2%
15%
3%
42%
5%

4%

11%
18%

China India Indo nesia Vietnam Thailand USA B razil Others

Source: SIAM, ACMA

India is the second largest two wheeler market in the world, along with china both together
they share 60% of two wheeler business of the world and both are the fastest growing
economy in the world.

KRC RESEARCH 4
 Weekender

Aug 4th’, 2007

Penetration Level

Per capital two wheeler (Per thousand population)

700
590
600
500
400
286 258
300
200 140
90
100 37 52
0
India

China

Thailand

Malaysia

Indonesia
Vietnam
Taiwan

Source: Ward Auto, SIAM, World Bank

India is one of the lowest per capita two wheelers per thousand populations in the world,
behind even other Asian developing economy, which provides a greater scope to increase the
low base.

Segmental Breakup for Two Wheelers

4% 11% 5%
1%

79%

Moped Motor Cycle Step Thru Geared Scooter Ungeared Scooter

Source: SIAM

Two wheelers segment constitutes 79% of overall pie of Indian automobile industry and two
third of Indian population resides in rural, two wheelers are an important means of transport
in rural area due to rough conditions of roads.

Three Wheelers
Three wheelers are one of important vehicle used for short distance traveling and goods
transportation. FY07 recorded sales growth of 12% to 403909 units as compare to 359920
units in FY06; this segment has shown excellent growth of 15% CAGR over last 5 years. The
export has recorded a robust growth of 87% to 143896 units against 76881 units in FY06.

KRC RESEARCH 5
 Weekender

Aug 4th’, 2007

Thr e e Whe e le r M ar k e t s har e

68%

40%
23% 24%
12% 13% 12%
2% 1% 5%

Bajaj Piaggio Mahindra Force Others

Passanger Goods

Source: Companies
Bajaj Auto is the market leader in the three wheelers segment with over 68% market share in
passenger vehicle and 23% in Goods segment.

Passenger Car
Volume Numbers
Particulars June.07 June.06 % CH Q1FY08 Q1FY07 % CH
Passenger Car 94,021 80,247 17% 275,035 243,188 13%

Passenger car segment continued to record handsome growth in Q1FY08 clocking 13% growth
to cross 275035 units. The rising household income coupled with easy availability of finance
(80% of passenger car sales is financed by auto loan) even at higher rate in recent time has
continued to support the volume growth.

The share of compact car (A2 Segment) has reached to 70% to 752280 units as compare to
65% (572743 units) in FY 2005-06 one of the major reasons for this growth was the favorable
excise duty cut on small car from 40% in 2001 to 8% in 2006

Per Capita Passenger Car (Per Thousand Population)

600
480 480 500
500 440

400

300
180
200 130 147
122
90
100 27
8.5 17 10 12 13
0
UK

Germany
India

China

Indonesia

Sri Lanka

Thailand

Mexico

Malaysia

Japan

USA
Philippines

Singapore

SouthKorea
Brazil

Source: Ward Auto, SIAM, World Bank

India is still one of lowest car per thousand populations in the world, as the economy is
growing at 8.5%+ there is huge opportunity to expand this market going forward.
Commercial Vehicles
Particulars June.07 June.06 % CH Q1FY08 Q1FY07 % CH
MHCV & LCV 40,673 38,019 7% 112,763 105,660 7%

India is 5th largest commercial vehicle market in the world, booming economic activities in
mining, construction, roads, ports, airports, urban infrastructures, irrigation is continued to
push the demand for commercial vehicles in the last mile distribution segment. The recent
Supreme Court ban on overloading has fuel the demand. Going forward road infrastructure
projects led by Bharat Nirman cover massive rural road networks with objects of all weather

KRC RESEARCH 6
 Weekender

Aug 4th’, 2007

roads for habitation over 1000 people. The government has envisaged to spend over Rs480
billion for rural road connectivity.

Market share (%)-LCV Market share (%)-MHCV

Source: Crisinfac

Tata Motors continued to enjoy driving seat in LCV and M&HCV segment with market share of
68% and 64% respectively.

SWOT Analysis

Strength Weaknesses
1) Low Investment in R&D to 0.4% as compare
1) Cost Advantage: Wage rate is $8 per shift to
than $ 20 in developed market 8% in developed market
2) Strong Engineering skills in design etc. 2) Infrastructure bottleneck
3) Skill in low cost of automation due to software
expertise
4) Quality Conscious Manufacturer’s due to widening use of
global technology
Opportunities Threats
1) Commercial Vehicle: SC ban on Overloading 1) Rising input cost: Steel and Rubber Prices
2) Heavy thrust on mining and construction activity 2) Inflation & Rising Interest Rate
3) Cut Throat Competition-Margin Under
3) Passenger Car: Rinsing income level Pressure
4) Excise duty cut from 40% in 2001 to 8% in 2006
5) Capacity has balloons to 3 million cars pf industry
6) New offering and reduction in the holding period from
4 years from 4.5 years
7) Massive rural road networks with an investment of Rs480
billion. All weather road to habitation over 1000 population.
8) Two Wheelers: rising rural demand

Outlook

Although rising cost of debt in last few months have casts the shadow over the buoyancy of
the Indian automobile industry, still we are very positive on this sector going forward.
Commercial vehicle segment will continue to show robust performance on back of stricter law

KRC RESEARCH 7
 Weekender

Aug 4th’, 2007

implementation on overloading the trucks and increasing freight rates. We expect compact
cars segment which has the largest market share of 69% will be overcrowded with new
models coming in the markets in near future. The two wheelers segment likely to witness
more new models in higher segment due shifting consumer preference towards high power
and better fuel efficient vehicles.

House Hold (Mn.) Population (Mn.)

Income Level Segment 1995-96 2001-02 2009-10 1995-96 2001-02 2009-10
>
Rs.5,00,000 Rich Class 1.2 2.6 7 7 15 40
Rs. 3,00,000 Upper Middle
- 5,00,000 Class 33 46 91 186 265 525
Rs.1,00,000 -
3,00,000 Middle Class 54 74 85 312 429 490
< Rs.
1,00,000 Lower Class 77 57 30 444 332 177
Source: SIAM & ICICI Bank

The major factors for growth would be strong macro fundamentals, increasing spending
power, financing schemes, under penetration of markets and increasing rural income.
Supportive government policies and huge infrastructural projects will further accelerate the
growth.

Under passenger car segment the industry converts a household in to a prospect buyers as
soon as the household income reached to the price of a car. The compact cars (A2 Segment)
which is the largest segment are price between Rs. 2,00,000 to 3,00,000 and number of
upper middle class household having income between Rs. 3,00,000 to Rs. 5,00,000 would
reached to 91 million from current level of 55 million covering more than 525 million
population of the country, at the same time the middle lower income group household having
income level up to Rs.3,00,000 would cross 85 million covering more than 490 million
population. Together both the segment would cover more than 90% of Indian population, at
the same time lower income group household will decrease thanks to rising income level
coupled with near double digit GDP growth.

The above statistics provide a great opportunity for automobile industry to excel going
forward.

KRC RESEARCH 8
 Weekender

Aug 4th’, 2007

Relative Valuations.

Disclaimer:
This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the
information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any
investments. Kisan Ratilal Choksey Shares & Sec Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the
reports and consequently, is not liable for any decisions taken based on the same. Further, KRC Research Reports only provide information updates and
analysis. All opinion for buying and selling are available to investors when they are registered clients of KRC Investment Advisory Services. As a matter of
practice, KRC refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,Kisan Ratilal Choksey Shares & Sec
Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in
circulation.

Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.

Members: BSE & NSE
1102, Stock Exchange Tower, Dalal Street, Mumbai 400
www.krchoksey.com
001. Phone : 91-22-56338050 Fax : 5633 8060

KRC RESEARCH 9