The passenger car segment is showing clear signs of slowdown due to macro headwinds. However, two-wheelers, light commercial vehicles (LCVs) and utility vehicles (UVs) continued to record strong volume growth. Although 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 exports potential.
Earnings before interest, taxes, depreciation and amortization (Ebitda) margins are estimated to improve in the second half as compared with the first half of FY12, benefiting from easing commodity costs. However, increasing competitive intensity in some segments would restrict pricing power. We anticipate cost reduction measures, productivity improvement programmes and high operating leverage to off-set the impact of pricing pressures.
Although headwinds are receding, few uncertainties remain. With interest rate tightening cycle nearing its end, we expect interest rate sensitive segments such as passenger cars and medium and heavy commercial vehicles (M&HCVs) to get some reprieve. This coupled with softening of commodity prices would result in stable cost of ownership. However, further increase in petrol prices and levy of an additional duty on diesel vehicle would negatively impact passenger vehicle demand in the short term. Also, competitive intensity is also set to remain high in all the segments.
Valuation and view
Auto stock performance has been strong over the last six months with outperformance by all companies, except Tata Motors Ltd and Maruti Suzuki India Ltd.
With two key headwinds—increase in interest rates and higher commodity prices—expected to recede, we expect segments such as car and commercial vehicles (CVs) to be the biggest beneficiaries.
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We prefer companies less vulnerable to competitive dynamics, enabling dilution of short-term headwinds—Hero MotoCorp Ltd, Mahindra and Mahindra Ltd (M&M) and Tata Motors.
Hero MotoCorp: The company’s volumes grew 1.3% year-on-year (y-o-y) to 512,238 units driven by strong demand at the retail level. It recorded its highest retail volumes of at least 650,000 units in October. We estimate volume growth of 16.1% for FY12, implying residual growth of 12.8% and residual monthly run-rate of 536,464 units. Its scooter brand “Pleasure” continues to grow strongly and contributes over 34,000 units per month.
M&M: It recorded its highest-ever volumes at 73,344 units, a growth of 25% y-o-y, driven by strong growth in tractors and UVs. Our FY12 volume growth estimate of 16.6% implies residual growth rate of 4.4% and residual monthly run-rate of 54,708 units (will see an upgrade based on current momentum).
Tata Motors: The company’s total volumes grew 5% y-o-y driven by M&HCV volume growth of 15% y-o-y. Total volume growth (excluding Nano) is 4% y-o-y. Excluding Nano, domestic car volumes de-grew by 5% y-o-y. Nano volumes improved to 3,868 units. Our FY12 estimates factor in volume de-growth of 15.5% for passenger vehicles (inclusive exports).
Edited excerpts from a report by Motilal Oswal. Send your comments at firstname.lastname@example.org