What lies behind these impressive statistics? The urban markets are saturated — rural and semi-urban India, however, are in top gear
Statistics can be great fun. Shown variously using multiple software tools provides great relief, often in colour. But looking beyond them is even better. The year-on-year increase in automobile sales for August 2010 is one such case in point. With the possible exception of Fiat, it seems everybody else in the motor vehicle business in India has registered a 15%-35% growth in sales - and even more in the case of some manufacturers who had low baselines to start with in 2009.
But numbers, as always, don't always provide the full picture. Especially, when it is easier not to look beyond the numbers.
So where are these increased sales coming from, and what are the factors influencing them, what's the picture behind dry statistics?
Getting truthful answers out of the marketing, sales and production people in automobile companies is like trying to remove sugar from jam and marmalade. You know it's there. They know it's there. You get a lot of sweetness, and the label tells you that jam made out of strawberries needs to be bright red in colour, but the truth is truly all well mixed up inside - unless you look at the fine print on the labels.
And the fine print behind much of this growth is - semi-urban and rural India. None of the people from the automobile companies were willing to come on record, because some of this is now strategy, and some of it is success, and some of it is surprising to them too, but here goes anyways. Gandhiji was spot on correct, and nowhere does it show up better than with automobile sales lately.
A leading motorcycle manufacturer speaks about regularly getting requests for quotations for a truckload of motorcycles - model, colour, version all spelt out in advance. The buyers are often from habitats where dealers and their sub-dealers are simply unable to provide the kind of discounts and other benefits that buyers have started expecting as a standard. Increasingly, registration is not something that requires anything more than an RTO agent - which the dealers use anyways.
An old timer truck manufacturer speaks about how new entrants like AMW and Tatra-Vectra are reaching out to customers in parts of the country where dealers who were content working out of the larger cities never bothered to set up facilities. Entry for newcomers is cheaper in such places, too, and very often large fleet customers provide solutions for after-sales and support on their own, since they have the parking space already. It is interesting to add here that the ex-Armed Forces element comes to the fore again - dumpers and other rural truck applications need rapid maintenance best provided in-house, so why not be a dealer for the fleet you buy, and get the help of the manufacturer in maintaining these 24x7 vehicles?
A car manufacturer who has a leading position in the Indian car market, but has not expanded its repertoire beyond cars in the last few decades, explained it thus: 70% of sales last year were in urban cities above a certain population. This year with a 40% growth, the actual number sold in those large cities remained more or less the same, but the 30% component in numbers of rural and semi-urban areas more than doubled. In other words, their growth came almost totally from semi-urban and rural areas. The math was fascinating when model breakups were further discussed - people in rural areas increasingly want 3-box cars, not hatchbacks.
The same manufacturer explained how his dealers in large cities were discounting cars, while their dealers in smaller towns and rural areas were running short of cars. A complicated quota system based on past performance skews matters, with more despatches being sent to city dealers - who then released their "quotas" to smaller dealers or operated their own sub-dealers there. This is a company, by the way, which was born out of selling cars on quota and has still not got out of the habit. Public sector roots do not wither away that easily.
Another car manufacturer, trying hard to also enter the small commercial vehicle space, spelt it out thus - the urban market is saturated. For them, growth of cars has and will come in areas where smaller commercial vehicle sales are growing - the south, the newly resurgent states like Bihar and some parts of the North East. Kerala, for example, is a small state - but they have dealers in every town and sometimes multiple ones, too.
The increase in road and other taxes for cars and other motor vehicles in larger cities has brought about a situation where people living in larger cities are using the addresses in their 'native place' or small towns nearby to save large sums of money. Witness the growth of HR and UP plates in and around Delhi, and Talegaon/Raigad registrations in Mumbai. In some places, even a registered letter sent to yourself c/o a friend's address is sufficient enough as address proof.
The emergence of the motor vehicle as a tool for work, written about earlier, is another factor. This was shown brilliantly in Gujarat and Rajasthan, when good quality roads were made accessible all over, and is being experienced in Bihar, where a road quality revolution is taking place quietly. Note - the improvement has to be viewed through a prism of relativity - where there were rocks in paddy fields you now have decent tracks, and where you had broken roads, you now have highways. A 6-8 hour drive, not attempted at night, is now a 2-3 hour drive - and safe at night too.
Also hidden in the statistics are the numbers pertaining to a rapid shift of used cars upcountry - where they are maintained cheaper, without too many of the regulatory aspects bogging down this trade. This in turn creates a void in the new car market, which is filled - but surprisingly, here again it seems to be upcountry that is leading the numbers. Pajero and Fortuner are the new standards in rural India, and the German SUVs are getting there, too.
It may sound very simplistic to place all growth into non-urban areas, and certainly numbers are not available, so we have to go by off-the-record conversations - but here's one anecdotal one that will probably provide an idea - a leading agricultural products support company negotiated hard with a leasing company and a car manufacturer for about 350 cars to be provided to its staff. These cars had to be sedans, diesel, tough, presentable, supplied all-India, and were on a 3-year lease, to be registered in the name of the employees. Not one of these cars was registered in urban cities.
This, in turn, persuaded another company in the engineering products business, with a nationwide support network, to do the same. Again, it is better and cheaper to register cars in smaller towns. Again, all registered 'up-country', the benefits of lower prices being passed on to the user employee.
Expect the manufacturers and sellers of luxury cars and bikes to follow suit. Already, some of them have dispensed with wearing suits and sponsoring golf tournaments, to kitting out in jeans and sending roadshows to agricultural fairs. But then, who goes to rural India to check realities out?
There's an answer there too - some of these vehicles are being fitted out with GSM/CDMA based information systems, in addition to GPS systems, to function as offices on wheels wherever they are (and also to track them in case of theft). Expect hard analysis on data emanating from these to hit the marketing tables soon. Say, 6-12 months. And that's when the real reportage will start.
While the execution of the commercials could have been a little more edgy and dramatic, the idea does its job well
Makers of TVS Scooty have found an all-new way to hawk their colourful scooties. More as a fashion accessory rather than a machine that gets you from Point A to Point B (that's if you don't encounter a sozzled Honda Accord driver along the way).
The hip and hot scooty is targeted at teenaged girls. One commercial features a young babe riding her machine. She decides to wear her make-up along the way at a traffic signal. She's a gurl with loads of attitude, you see. The young rider spots a car with closed, reflective glass window panes (that's totally illegal, by the way! Hope someone is planning to launch a strong complaint with the toothless ASCI). And she uses that 'mirror' to sex herself up. Meanwhile the dude at the wheel (whose partner is busy yakking away on the cell phone… probably in discussions with a divorce lawyer) starts ogling at the pretty girl. And as his mouth starts watering, missus gives him an ugly glare. The TVS Scooty girl with attitude, who clearly knows the effect she's had on the driver, cheerfully sashays her way back to her bike.
The second commercial also stars a high attitude girl. In this one, a neta convoy has held up the traffic. Inpatient, she furiously bajaos the horn, but the cop won't pay heed. She then starts teasing the cop with juvenile facial expressions. The poor cop, unable to handle this 'assault', lets her go through. All very well, but if the convoy passing by had been that of a VVIP, the poor lass could have got into serious trouble later on, but that's another story, of course.
I do believe this is a sound advertising strategy. There's not much tech loaded inside a humble scooty, so there's really no point belting out product features. What the 'Babelicious' idea does is to position the scooty purely as a great companion amongst the fash conscious young girls, an extension of their own vibrant personalities. Instead of being treated as a boring, basic, down-market vehicle, which it actually is. In fact, I think scooty makers will have to increasingly look for such glamour images if they hope to attract the attention of youngsters. Yes, while the execution of the commercials could have been a little more edgy and dramatic, the idea does its job well. Girls with attitude (and there are plenty of them these days!) should connect with this stuff.
Capacity expansion could bring good growth in volumes and margins for the steel maker over the next couple of years
Prakash Industries is a steel maker with facilities in Champa and Raipur in Chhattisgarh. Besides producing steel (0.7 million tonnes per annum or mtpa), the units also make sponge iron (0.6 mtpa) and ferro alloys (0.048 mtpa). The company also has a 100 MW captive power unit.
However, Prakash does not sell billets or sponge iron, as these are further processed into value-added products such as structurals, thermo-mechanically treated (TMT) steel and wire rods. The company also has a coal mining capacity of 1 mtpa.
The company has quite a few positives. First, it plans to expand steel capacity to 1mtpa which would make it a volume growth story to watch. Edelweiss Securities, in a recent report on Prakash Industries, said it expects the company's sales volumes to increase from 0.51mtpa in FY10 to 0.83mtpa in FY12, a CAGR (compound annual growth rate) of 28%.
The current sponge iron capacity is less than what the company requires and as a result the company outsources billets and direct reduced iron (DRI). It plans to also expand its sponge iron capacity to 1.2mtpa by March 2013 (about 0.2mtpa every year through FY11-13). This should help it meet its requirements for captive billets and DRI and result in margin expansion.
Prakash is setting up a 625MW power plant. Angel Broking has said that the company's management has indicated a modification in the plan for the power plant. About 125MW will be commissioned between November 2010 and March 2011 and two units of 100MW each will come on-stream by March 2012 and March 2013. (The earlier plan was for two 125MW units). The rest 300MW (two 150MW units) will come on-stream by March 2014 and March 2015.
Prakash has also been operating a coal mine in Chotia, Chhattisgarh, since 2006. The mine has B grade reserves of about 50 million tonnes (mt) with current extraction of about 1 mtpa. The company has also been allocated the Madanpur coal mine (C & D grade), which has reserves of 50 mt, in a consortium with seven companies. The operations are expected to commence by August 2011. It has also been allocated coal mines at Fatehpur, Chhattisgarh, but the reserves here are said to be inferior (E&F grade) and would not be useful for processing steel. This mine will not be operational for another three years.
Prakash is also close to getting clearances for its captive iron ore mine at Kawardha, Chhattisgarh, Edelweiss said in its report, and the company aims to be a hundred per cent integrated by FY12. This would result in potential savings of nearly Rs6 billion. The iron ore reserves (a high Fe grade that is above 65%) are estimated at 75 mt. The company has indicated that it would begin mining here by March 2011.
Prakash has yet another mine in the Sirkaguttu district of Orissa with reserves of
10 million tonnes and a 65% Fe content. The management expects to
commission the mine in December this year.
The expansion plans are to be funded (Rs33 billion) without any additional debt. The total debt, as of March 2010, was Rs1.3 billion, or 0.1x equity. Of the Rs33 billion required for expansion, Rs8 billion is for steel, Rs23.5 billion for power and Rs1.5 billion for mines. There is no need for any more land acquisition as Prakash already has about 800 acres and only 300 acres is occupied by infrastructure currently. It would require another 250 acres for the expansion.
Angel Broking expects EBITDA to register a 35% CAGR over FY10-12. The brokerage has a 'buy' on the stock, with a target price of Rs232 (current market price Rs180). Edelweiss Securities values the stock at 5x FY12E EV/EBITDA for the steel business and on discounted cash flow (DCF) for the first 125 MW power unit. It has put the fair value at Rs 261.
The two-week average volume traded on the BSE was around 300,000 shares. Prakash has a market cap of Rs22 billion. In the quarter ended June 2010, sales were Rs4.6 billion against Rs3.6 billion in the previous corresponding period, while net profit was Rs697 million against Rs586 million in the year-ago period.
It has been reported that Prakash Industries is in talks to buy Nova Iron and Steel, but the company has denied this. The biggest risks to the performance of the stock would be a delay in capacity expansion or delay in clearances for mines.
The stock had a mild bullish breakout mid-August, but it has stayed flat since then.
It is now trading far lower than the April-May high of about Rs 240.