Automobile Sector - Gearing up for festival season - Angel Broking

For September 2012, automakers posted poor yoy sales; however, yoy comparison renders meaningless in view of the shift in festival season to October-November this year as against October in 2011. Sequentially, automakers registered a healthy growth (ex Hero MotoCorp) which surprised us positively. While momentum in the sales of light commercial vehicles (LCV) and utility vehicle (UV) was maintained, medium and heavy commercial vehicles (MHCV), tractors and two-wheelers sales continued to witness a challenging environment due to demand slowdown. Among auto majors, Mahindra and Mahindra (MM; automotive division), Maruti Suzuki (MSIL) and Ashok Leyland (AL) reported a significantly better-than-expected growth; Hero MotoCorp (HMCL) registered a sluggish performance led by build-up in inventory. Going ahead, we remain cautiously optimistic on auto sales as we expect demand to revive partially led by festival season buying.

Tata Motors (TTMT) reported marginally better-than-expected volumes led by a strong 15.2% yoy (11.4% mom) growth in LCV sales. Total volumes however, registered a fall of 3.8% yoy (up 5.5% mom) as passenger vehicle (PV) sales declined by 17.2% yoy (2.8% mom). Commercial vehicle (CV) sales posted a modest growth of 3.2% yoy (9.4% mom) due to a 16.6% yoy (up 5.3% mom) decline in MHCV sales which were impacted by slowdown in industrial activity.

AL registered a 20.7% yoy (12.6% mom) growth during the month on the back of strong momentum in its small commercial vehicle, Dost. Total volumes ex-Dost registered an 11.7% yoy (up by a strong 15.1% mom) decline on account of sluggish MHCV demand led by slowdown in economic activity.

MSIL posted a better-than-expected sales growth of 9.8% yoy (73.6% mom) as production at Manesar plant continued to improve post the lock-out. Volumes during the month also benefitted from a ramp-up in production at the Gurgaon plant ahead of the festival season. While domestic sales increased 12.7% yoy (77.1% mom), exports sales were down 23.1% yoy (up 28.9% mom). The sales in the mini segment, which had been on a declining spree since the last one year, turned positive during the month registering a 4.9% yoy (77.5% mom) growth.

MM continued with its strong sales momentum in the automotive segment (aided by XUV5OO and new Verito) registering a 9.5% yoy (5.5% mom) growth in volumes, which was ahead of our estimates. Total volumes however, registered a 0.6% yoy decline (up by a robust 15.8% mom) led by an 18.6% yoy decline in tractor sales. On a mom basis, however, tractor volumes recovered 51.8%. During the month, MM launched a compact sports utility vehicle, Quanto at an attractive price point of Rs.5.8lakh (ex-showroom Thane).

Two-wheelers and three-wheelers: Bajaj Auto (BJAUT) reported volumes in line with our estimates, though; total volumes posted a decline of 13.8% yoy. On a mom basis though, total volumes improved 4.4% led by new launches - Pulsar 200NS (~9,000 units) and Discover 125ST (~35,000 units). HMCL posted extremely weak volumes for September 2012 as total sales declined by 26.4% yoy (8.8% mom) led by slowdown in retail sales. TVS Motor (TVSL) posted marginally better-than-expected sales (up 10% mom) driven by a sharp sequential jump in motorcycle (up 18.9% mom) and three-wheeler (28.1% mom) volumes.

Outlook

We believe the long-term structural growth drivers of the Indian automobile industry such as GDP growth (leading to increasing affluence of rural and urban consumers), favorable demographics, low penetration levels, entry of global players and easy availability of finance are intact, which should support a 10-12% CAGR in auto volumes over FY2012-14E. As such, we prefer stocks that have strong fundamentals, high exposure to rural and export markets and command superior pricing power. We remain positive on AL, HMCL, MM and TTMT.

Source : Equity Bulls

Keywords