Competent Automobiles Company Ltd Management Discussions

OVERALL VIEW

The domestic automotive industry recorded robust growth trends across segments in FY2023, aided by a low base, recovery in economic activities, and increased mobility. Following a period of robust growth and a relatively healthy base across automotive segments, the pace of growth has moderated in FY2024, and the trend is expected to continue in FY2025 as well. Aided by a preference for personal mobility and stable semiconductor supplies, passenger vehicle (PV) industry volumes are estimated to reach an all-time high of 4.1 million units in FY2024 (representing a growth of 6-9% over FY2023). Even as the underlying demand drivers remain supportive, the volume growth for the segment is likely to moderate to 3-6% (from an elevated base). Lower growth expectation for next year partly stems from a high base and, to some extent, by waning pent-up replacement demand, which supported the industry over the past couple of years.

Federation of Automobile Dealers Associations (FADA), the auto retail body noted that with a notable decline in consumer sentiment among urban Indians, as reported by the Centre for Monitoring Indian Economy (CMIE), the automotive sector faces a nuanced challenge. This downturn, characterised by a restraint in discretionary spending within urban income brackets, adds a layer of complexity to the industry?s landscape. In this scenario, the decision of the MPC of the RBI to keep lending rates unchanged at 6.5% would continue to badly impact the retail sales of all vehicles, especially entry level vehicles as these buyers are extremely price sensitive. Given the continued inflationary trend without any relief in finance rates, these prospective buyers may continue to hesitate.

The industry?s adaptability is further tested by improved supply dynamics and an increasing bend towards electric mobility, alongside enticing financing options, all poised to mitigate the effects of the current economic sentiment and electoral caution.

The automotive sector?s resilience is thus spotlighted, with concerted efforts to tackle these challenges through innovation and strategic market engagement. As it navigates through a period marked by careful optimism, the sector is positioned for a cautious yet hopeful trajectory towards recovery. The strategic foresight and adaptability demonstrated by the industry promise a pathway to resilience and sustained growth, even as it confronts evolving market conditions.

Heading into FY2025, the Indian auto industry is poised for growth amidst a mix of optimism and challenges. The excitement around new product launches, particularly electric vehicles, sets a forward-looking tone. Manufacturers are gearing up with better supply chains and an array of models to meet diverse consumer demands. Economic and financing schemes to boost sales. However, it faces challenges like high base in PV segment and intense competition. The focus is on overcoming these hurdles with innovation and strategic market engagement, aiming for a balanced growth across all the segments. As FY2025 unfolds, the Indian auto industry is navigating through evolving market demands and economic conditions, leveraging its strengths for sustainable growth and a wider reach.

INDUSTRY OVERVIEW, STRUCTURE AND DEVELOPMENT

The automobile sector is one of the key segments of the economy having extensive forward and backward linkages with other key segments of the economy. The Indian automobile industry comprises of a number of Indian-origin and multinational players, with varying degree of presence in different segments.

Automobile dealer Industry plays the vital role of link between the manufacturer of the automobile and the consumer. With large inventories of cars, dealers provide consumers with a wide array of vehicles to meet their needs at different price points. The sales of most of automobiles today are subject to changing consumer tastes, the popularity of the manufacturers vehicle models, and the intensity of competition with other dealers. Along with the sale of the car, most dealers also sell additional automobile-related services to potential buyers. These services include extended warranties, undercoating, insurance, and financing. After-market sales departments sell these services and other merchandise after vehicle salespersons have closed a deal. Sales of these packages greatly increase the revenue generated for each vehicle sold.

Performing repair work on vehicles is another profitable service provided in this industry. Service departments at motor vehicle dealers provide repair services and sell accessories and replacement parts. The work of the service department has a major influence on customers satisfaction and willingness to purchase future vehicles from the dealer.

Industry Structure: The automobile dealer industry is comprised of two segments. New car dealers, often called franchised dealers, primarily sell new cars, sport utility vehicles (SUVs), and passenger and commercial vehicles. These franchised dealers sell vehicles manufactured by a particular company, which may include several brands. Used car dealers comprise the other segment of the industry, and are sometimes referred to as independent dealers. These dealers sell a variety of vehicles that have been previously owned or formerly rented and leased. Improvements in technology have increased the durability and longevity of new cars, raising the number of high-quality used cars that are available for sale. Used car dealers by definition do not sell new cars, but most new car dealers do sell some used cars.

Developments

Demand for Electric Vehicles (EV) are on the rise. The Current Market Share of EVs in India?s Automotive sector is standing at 0.7%, however, by 2027, this figure is set to reach at 3.8%.

Further, the availability and adoption of advanced technology solutions is driving the majority of the underlying trends in the auto industry. Connected cars, sensors, electrification, and new business models (including mobility-as-a-service) all take advantage of advanced technology solutions. Thats where industry experts say the automotive industry needs to focus going forward. The entire industry, from suppliers to automakers, is challenged to keep existing operations profitable, while simultaneously building out capacity to tackle these new innovations. Companies must find the right balance between continuity of a stable and profitable business, while at the same time lead the way in disrupting their own business models.

While many automakers and suppliers learned from the past to help them survive recent disruptions and make their existing operations more efficient, some industry leaders say that flexibility and innovation will be critical when it comes to the unique challenges facing the future direction of the automotive industry.

Automotive companies need to innovate and develop solutions quickly in order to react fast to changing customer demands and market opportunities. In a digital world, innovation must become an integral part of each department and discipline, so the entire enterprise contributes to generating top-line, bottom-line, and green-line improvements.

Historically, the Indian Passenger Car Market has been skewed towards small passenger cars. However, there is a structural change taking place in the industry with demand for UVs taking over the passenger car. This shift is paving a way towards new avenues of the growth and will results in a more profitable growth for the sector.

In an effort to achieve greater financial and operational efficiency and flexibility in the automobile dealer industry, greater emphasis is being placed on after sale services, such as vehicle maintenance and repair, at both new and used car dealers. These services remain less susceptible to economic downturns. They are also part of an effort to enhance customer loyalty and overall customer service.

The increased use of the Internet to market, new and used cars has also had a significant impact on automobile dealers. Through the Internet, consumers can easily access vehicle reviews, view pictures of vehicles and compare models, features, and prices. Many websites allow consumers to research insurance, financing, leasing and warranty options. As a result, consumers are generally better informed and spend less time meeting with salespersons.

Moreover, sales of automobiles on digital platforms, integration of wireless technology in cars, and entry of connected nd autopilot-enabled vehicles in the market are some of the factors that are going to fuel the growth of the automotive industry.

OPPORTUNITIES AND THREATS Opportunities

India being one of the largest automobile markets in the world, has a bright future because of several factors like rising of living Standards, strong Research & development advancement, shifting of manufacturing hub to India, Growing teenage drivers, overall growth of other industries, infrastructure development and the improved road infrastructure. This along with rising disposable income, aspirations for a better lifestyle and a slew of new product launches lined up by companies would aid overall increase in sales volumes. The Company, with its wide portfolio is expected to benefit from the same.

Threats

Affordability is the most important demand driver in India, the domestic car market has until now been segmented on the basis of vehicle price. Price based competition also takes place in a continuum than in segments since nearly all the models are launched in multiple versions at different price points. As a result higher end variant compete with lower-end-variant of a car in a segment above it.

Government are enforcing strict rules relating to pollution, safety, and other aspects on the vehicle sector. These regulations can significantly raise the costs of vehicle manufacturing because companies may need to invest in new technologies or processes to comply with such laws.

Also, the growing popularity of ride-sharing services such as Uber has reduced car ownership and demand for new vehicles. This trend is expected to continue, especially in urban areas with easy access to public transportation and ride-sharing services, which may result in lower vehicle demand.

Consumer confidence, interest rates, and employment levels are all highly dependent on macro and microeconomic factors in the automobile industry. Consumers may be more cautious about spending money on large-ticket items such as cars during economic downturns.

Further, intensity of competition has increased in almost all the segments of the Indian automobile dealers market whether it?s a competition for sales of cars from dealers of same brand or of competing brands or competition in after-sales service business from other dealers of same brand or from organised (branded) franchised service network or from unorganised local garages.

Moreover, in the automobile dealer industry, vehicles cannot be kept in the store for long unlike consumer durables, as automobiles lose value with time. The model gets old and the customer would not be willing to pay for it. The damage due to handling, if they are in the showroom or warehouse for too long, is another factor. Other factors like affordability, innovation, infrastructure facilities and price of fuel, stringent emission norms and safety regulations and interest rates affect the demand for automobiles to a larger extent. These factors and challenges always keep the automakers and dealers on their toes.

OUTLOOK

The automotive industry in India is set to expand at a compound annual growth rate (CAGR) of 11.3% till 2027. This growth will most likely occur due to factors like rising disposable income, wide availability of credit and financing options, and growth of population. The management of the Company believes the long term outlook for the automobile industry is bright and robust, though outlook for the Indian auto industry in near term is expected to remain stable growth.

RISKS AND CONCERNS

Indian car industry is one of the most promising industries across the globe. It has gradually strengthened its foothold in the international area as well. The country is dealing with many car manufacturers, dealers, and associations in various countries including U.S. From some countries, India imports cars and car components and to some India exports. Though India has witnessed a growing customer base, it has not inoculated them from the global crisis. The crippling liquidity and high interest rates have slowed down the vehicle demand. Rising Input costs of commodities, availability of credit and affordable interest rates are important facilitators for automobile sales. The uncertain exchange rates and a sudden increase in dollar value against Indian rupee have contributed to slowdown. Increasing Dollar value has raised the landed cost of imported machine, tools and even raw materials required for production.

In addition, rising cost of dealership operations, limited availability of trained and untrained manpower, increasing labour and wage rates, prospects of accelerated career growth and better training & development opportunities have kept the margins of dealership operations under immense pressure.

Intensity of competition has increased in almost all the segments of the Indian automotive market due to entry of new players and appointment of new dealers by Maruti. Launch of new models by different players have also increased market competition. This increasing level of competition would also translate into higher selling and distribution costs. The Company is aware of the increasing competition and is taking measures to remain competitive in the market place.

SEGMENT WISE BUSINESS PERFORMANCE

Competent Automobiles Co. Ltd. is mainly in the business of trading and servicing of Maruti Suzuki vehicles. The Company operates in two segments, namely, Showroom and Services & Spares. The Showroom segment deals with purchase and sales of vehicles manufactured by Maruti Suzuki India Limited. The Service and Spares segment includes servicing of Maruti vehicles and sale of their spare parts. For Segment wise business performance of the Company, please refer to note no. 39 in the notes to financial statement forming part of the annual accounts.

OPERATIONAL & FINANCIAL PERFORMANCE

The details of the operational & financial performance are appearing in the financial statements separately. For highlights, please refer to Directors? Report forming a part of this Annual Report.

HUMAN RESOURCES/ INDUSTRIAL RELATIONS

During the year, the Company has taken several initiatives to further strengthen its human resource base to meet its current & future growth plans. There was unity of purpose among the employees to continuously strive for all round improvements in work practices & productivity. Industrial relations were cordial throughout the year at all locations. As on 31st March, 2024, there were 1801 employees on the payroll of the Company.

INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY

The Company has proper and adequate systems of internal control in order to ensure that assets are safeguarded and transactions are duly authorized, recorded and reported correctly. Internal Audit function is looked after by team of in house Internal Auditor appointed by the Company, who conduct regular audit at all units/locations. Both the statutory as well as Internal Auditors independently evaluate the adequacy of internal control system. Based on the audit observations & suggestions, follow up & remedial measures are being taken on a regular basis.

CAUTIONARY STATEMENT

Certain statements in the Management Discussion & Analysis describing the company?s views about the Industry?s expectations/predictions, objectives etc. may be forward looking within the applicable laws and regulations. Actual results may differ materially from those expressed in the statements. Company?s operations may be affected with the demand and supply situations, input prices and their availability, changes in Government regulations, tax laws and other factors such as industrial relations and economic developments etc. Investors should bear the above, in mind.

KEY FINANCIAL RATIOS

In accordance with the SEBI (Listing Obligations and Disclosure Requirements 2018) (Amendments) Regulations, 2018, the Company is required to give details of significant changes (change of 25% or more as compared to the immediately previous financial year) in key financial ratios.