For September, volume growth in the auto sector is showing initial signs of slowdown and increasing inventory levels affected by macro headwinds, especially in passenger, and medium and heavy commercial vehicles.
However, two-wheelers, utility vehicles and light commercial vehicles continue to record strong volume growth. While volume outlook in the short term is affected by macro headwinds, we believe long term volume outlook remains positive driven by strong economic growth, improved availability of finance, new product launches and export potential.
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Though commodity costs have started easing now, higher levels in the first half of FY12 will put pressure on profitability. This coupled with increasing competitive intensity in some segments would restrict pricing power. However, cost reduction measures, productivity improvement programmes and high operating leverage would dilute effect of higher raw material cost. As a result, we estimate earnings before interest, tax, depreciation and amortization (Ebitda) margins to remain muted, after correcting from peak levels.
Auto industry is facing multiple headwind in the short-run, driven by (a) increase in cost of ownership as selling price increased due to partial pass through of cost inflation in raw material cost; (b) increase in cost of operations as petrol prices increased by around 28% and diesel price by 7% in last one year; (c) rising competitive pressures to restrict pricing power in the short term; and (d) tightening of monetary policy resulting in 150-200 basis points (bps) increase in interest rates for automobiles. However, the long-term volume outlook is positive due to improved economic activity, easy availability of finance and improved export outlook.
The performance of the sector has been strong over the last three months with outperformance by all auto makers, except Tata Motors Ltd. Both volumes and operating margins are expected to moderate from peak levels of FY10/11. We prefer companies less vulnerable to competitive dynamics, enabling dilution of short-term headwinds.
Hero Motocorp Ltd: Hero Motocorp volumes grew 27% year-on-year, or y-o-y, (9% sequentially) to 549,625 units driven by strong demand at retail level. We estimate volume growth of 15.8% for FY12, implying residual growth of 10.4% and residual monthly run rate of 530,366 units.
With ownership issue settled, we expect stock performance to be driven by the business momentum in the short run and smooth transition in the long run. The stock trades at 17.1 times estimated FY12 earnings per share (EPS) of Rs 113.30 and 13.6 times FY13 EPS of Rs 142.40. We maintain a buy on the stock.
Bajaj Auto Ltd: Bajaj Auto’s total volumes grew by 18% y-o-y (9% sequentially) to 417,686 units, driven by strong growth in export volumes. However, domestic volumes grew by 10% y-o-y to 275,773 units (higher than our estimate of 260,000 units) driven by volumes of Boxer 150cc. Based on our volume growth estimates, implied residual growth is 12.9% and residual monthly run rate of 356,473 units.
Our FY12 estimates factor in volume growth of 14.9% and 110 bps decline in Ebitda margins to 19.3%. The stock trades at 15.1 times estimated FY12 EPS of Rs 101.80 and 12.7 times FY13 EPS of Rs 120.60. We maintain buy.
Maruti Suzuki India Ltd: Maruti’s September volumes slowed by 21% y-o-y (6% sequentially) to 85,565 units. While domestic volumes fell by 17% y-o-y, exports fell 47.5% y-o-y. Based on our volume growth estimates, implied residual growth rate is 1.4% and residual monthly run rate is 113,950 units.
The stock trades at 14.9 times FY12 consolidated EPS of Rs 72.30 and 12.1 times FY13 consolidated EPS of Rs 89.20. We maintain buy.
Mahindra and Mahindra Ltd: Mahindra and Mahindra’s volume grew 31% y-o-y (28% sequentially) to 68,810 units, driven by strong growth in utility vehicles, tractor and three-wheeler volumes. Our FY12 volume growth estimate of 16.6% implies residual growth rate of 8.2% and residual monthly run rate of 57,814 units.
Our FY12 estimates factor in 16.6% volume growth (20% for utility vehicles and 13% for tractors) and Ebitda margins of 13.4%. The stock trades at 16.4 times estimated FY12 of consolidated EPS of Rs 48.90 and 12.2 times FY13 of consolidated EPS of Rs 65.60. We maintain buy.
Tata Motors Ltd: Total volumes grew by 22% y-o-y (23% sequential growth) to 78,786 units, driven by domestic commercial vehicle volume growth of 29% y-o-y (around 7% sequentially). Total volume growth (ex-Nano) is 20% y-o-y.
The stock trades at 6.2 times estimated FY12 consolidated EPS of Rs 25.30 and 11.3 times FY12 normalized consolidated EPS (adjusted for research and development capitalization) of Rs 13.90.
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