CLSA has come out of a report on the Indian Auto market. The research firm has come up with a conclusion that a combination of lower penetration levels, improving affordability due to rising incomes and soaring aspiration levels point towards a higher volume growth trajectory for cars as compared to two-wheelers in coming years. CLSA has maintained positive view on four-wheelers as against the two-wheelers. Top pick of CLSA in the Indian auto sector remains Maruti on which they have recommended buy rating with target price of Rs 980.

Income effect to improve affordability

Purchasing power of both cars and two wheelers kicks in when annual income crosses the price of a car (Rs 250,000, US$ 6,000) and a two wheeler (Rs 50,000, US$ 1,200). 95% of IT employees and 70% of Financial Services employees can currently afford cars. Affordability of two wheelers is near 100% for both the segments.

60% of IT employees and 73% of FS employees expect salaries to go up by more than 15%. This is important, as even in a pessimistic scenario (car price up 5%, petrol prices up 10% & finance rates up 200 bps from current levels) we don’t see ownership cost of a standard compact segment car rising more than 10% over the next year. Potential income growth of 15%+ would likely compensate for any cost of ownership escalation, in our view.

62% of IT employees and 41% of financial services employees are currently unmarried. More
important, 84% of the unmarried IT employees and 80% of the unmarried financial services
employees prefer a working spouse. This holds promise for medium-term car industry growth as double-income households are typically better able to purchase a car than single-income households. From the ‘Mr & Mrs India’ survey, 19% households own a car while 72% own a
two wheelers.

Soaring aspiration levels; greater preference for cars Vs two wheelers

60% of financial services employees already own a two wheelers. However, of the 40% that don’t own a two wheeler, 80% don’t even intend to buy one. 48% of financial services employees already own a car. However, unlike two wheelers, of the balance 52% who don’t own a car, 79% plan to buy one within 3 years (39% plan to buy a car in the next one year). Similar trends are visible among IT employees. 54% of those who don’t own a car plan to buy one in the next year.

The ‘Mr & Mrs India’ survey, which better represents India’s lower-middle to middle income households shows similar trends. Of the 21% households who want to buy a vehicle, 58% want to buy a car while just 38% want to buy a two wheeler.

In our view, aspiration levels are on the rise across India with the result that an increasing proportion of people now prefer to move from a no-vehicleownership stage to owning cars and bypassing two wheeler in the process.

Brand preferences: Maruti in cars; Hero Honda in two wheelers

Maruti emerges as the most desired car brand among IT employees, followed by Honda and Hyundai. In the ‘Mr & Mrs India Survey’, 45% of those who intend to buy cars prefer Maruti and just over 7% prefer Tata Motors.

Amongst the households planning to purchase a two wheeler, 45% want to buy Hero Honda while only 19% prefer Bajaj. This represents higher popularity enjoyed by Hero Honda in India’s semi-urban areas against Bajaj, which is more popular in urban areas. Hero Honda’s ‘Splendor-Passion’ duo are the two most popular motorcycle models in India, closely followed by Bajaj’s premium-end ‘Pulsar’.