Indian Autos:The under-appreciated work-horse of M&M –“Bolero Pick-up”

LCV is the most under-appreciated business of M&M, in our view. LCVs contributenearly 30% of the total volumes of M&M and nearly 25-30% of profits. We see apositive long-term outlook for this business – largely driven by growth in the overallLCV industry (which is down by 20% from the peak) and also a continued shift to thepick-up segment from the SCV segment driven by better economics and BSVItransition, where less than 2T SCVs may find it tough to remain commercially viable.

    The LCV industry (goods) has three segments – (A) Less than 2T trucks (SCV); (B)2-3.5T trucks (pick-ups) and (C) 3.5-7.5T trucks. In 2010-11, less than 2T trucks werec60% of the LCV industry. However since then, the <2T SCV segment contributionhas declined to 30% and segment volumes are less than half of peak volumes (inFY12). Some of this decline was led by the decline in the industry itself, whileparticularly noteworthy was the shift of buyers from <2T to “pick-up trucks”. Pick-uptrucks are ~40% more expensive than <2T SCVs, but have ~50% higher loadingcapacity and much better running cost economics. M&M has been a market leader inthe pick-up segment, led by the Bolero Pick-up and continued growth in this industryshould help M&M’s volume growth.

    Less than 2T SCV may become totally unviable in BS VI: While <2T SCV declinecontinues, we believe the segment will become totally unviable under the currentrequirements for BS VI, which are expected to be implemented by 2020. SCVs runon a small diesel engine (600-900 cc) and are priced ~INR 250-450K. Under BS VI,prices for these vehicles will go up by INR100-150K (~40% price increase) makingthem commercially unviable. In that context, we expect buyers to continue to moveup to the pick-up market, which should be positive for M&M, which is the marketleader in pick-ups.

    On the negative side, increase in competition in the short term may hurt: Weexpect growth in the pick-up segment to be strong in the long term, however in thenear term we see a significant increase in competition – just recently Tata launchedits pick-up Xenon Yodha, which will compete with Bolero. We also expect AshokLeyland to reinforce its presence in this segment based on its success of ‘Dost’.

    We expect M&M to be the key beneficiary of the positive growth outlook in the pickupsegment. We have not made any changes to our estimates in this note, butremain Buy with a TP of INR 1,480.