Financial Times

Tilt towards Indian passenger cars seen in market
Passenger car sales growth will bear a greater tilt towards Indian cars in future, Bartleet Mallory Stockbrokers (BMS) Research said in a recent report.
This is because Indian cars increasingly fit the bill of the emerging young corporate executives whose purchasing power will be limited to the lower end of the passenger car segment, while the higher bracket of the lower middle income earners would search for affordability and efficiency in a private mode of transport.

This trend is likely to help Diesel and Motor Engineering Company Limited (DIMO), agents for India’s TATA brand of vehicles. “TATA will be an invigorated revenue driver for the company,” BMS Research said in an analysis of DIMO’s strengths and weaknesses. DIMO faces significant political and “peace risk” as Jaffna and the north and the east will be growth markets for the company if peace stabilizes, it added.“Its brand partner TATA will have a special appeal to these markets. BMS expects substantial growth in this segment on development activities in the region getting a boost.”
Sri Lanka’s car ownership levels are much higher than that of her neighbours. Sri Lanka has 17.7 cars registered per 1,000 persons while in India it is 6.7 cars per 1,000 and Pakistan nine cars per 1,000.

However, alternatives to Indian cars such as mini Japanese cars and even the new Sri Lankan Micro may present themselves as significant players, the stock broker said.

Diesel and Motor Engineering Company in which the Hayleys conglomerate has a 27.7 percent stake, has interests in the vehicle market, vehicle parts and service market, lighting and power tools, construction and material handling.
BMS Research said DIMO’s key strengths include its long-standing partnerships with world-class players, strong brand name in the local market, consistent spread between higher end and lower end brands allowing the company to maintain stable cash flows and minimize its susceptibility to the general economic conditions of the country.

Another is the “increased preference and growing confidence in TATA as a brand with the passenger cars segment seeing significant growth followed by its pre-owned cars wing.” Improving GDP per capita statistics indicate increased purchasing power while urbanization and rural development will see an upward surge in some of the vehicle segments DIMO is engaged in with the right level of marketing efforts.

Among the key concerns listed by BMS Research is the firm’s “aggressive” cash management policy under which increased levels of short term borrowings may lead to working capital problems in the future. DIMO also faces credit risk and the sizeable default risk in its new revenue generating schemes.

“While the company obviously takes on a full credit evaluation, this does not eliminate the risk.” Currency risk for the company is significant, BMS Research said, adding that large fluctuations in the rupee to the US dollar and the euro are of concern. Rising crude oil prices will affect general transportation preferences. BMS Research said demand conditions are heavily pegged to the secondary market with the key variable being affordability.

“The passenger car industry is expected to see a slow but consistent rise over the medium term with the gradual upward trend in disposable income,” BMS Research said. In 2003, the passenger car market saw virtually a 60 percent rise in numbers with private car sales rising from 12,003 in 2002 to 21,184.
However, passenger cars registered over 2004 fell to 19,116 - a drop of 10 percent year on year compared to 2003. So far this year, the number of passenger cars registered is 8,869. BMS Research said the road network of the country may carry its pluses and minuses for DIMO.

Increased infrastructure and development projects will help the construction and material handling segment to record an appreciable performance. “However, the company’s opportunities in becoming a dominant player in the dual purpose vehicle segment may be crippled if the road network improves,” BMS Research said,“The increasing preference for dual purpose vehicles is aided by the yet to improve road network of the country.

Back to Business