Automobile Sector - Signs of festive cheer - Angel Broking

For October 2012, automakers posted a strong growth led by the onset of the festival season. While two-wheeler, passenger car (PC) and tractor volumes staged a smart recovery on the back of the festival demand; momentum in the light commercial vehicle (LCV) and utility vehicle (UV) segments was maintained. The medium and heavy commercial vehicle (MHCV) segment however, continues to struggle as weakness in demand persisted during the month. Among auto majors, Mahindra and Mahindra (MM) and Hero MotoCorp (HMCL) posted better-than-expected volumes for the month; while, Tata Motors (TTMT) and Ashok Leyland (AL) registered sluggish performance led by weakness in MHCV sales. Going ahead, we remain optimistic on the festive season demand and expect strong auto sales for November 2012.

TTMT reported subdued numbers as total volumes registered a modest growth of 5.5% yoy; however, volumes declined 5.3% mom despite the festival cheer. The weak performance can be attributed to weakness in the passenger car segment which declined 23% yoy (6.5% mom) led by a 38% yoy decline in Indica sales. Meanwhile, the CV sales reported a strong 19.5% yoy growth driven by sustained momentum in the LCV sales which registered an impressive growth of 55.2% yoy (1.9% mom). The MHCV volumes witnessed a steep decline of 29% yoy (22.2% mom) due to slowdown in industrial activity and lack of freight demand.

AL reported mixed numbers as CV sales ex-Dost posted a steep decline of 12.5% yoy (34.6% mom) led by continued weakness in the MHCV segment. However, Dost sales maintained strong traction and registered the highest ever sales of 3,033 units (flat mom) during the month.

MSIL reported an in-line growth of 9.7% mom driven by strong growth in the compact (Swift), super compact (Dzire) and export (A Star) volumes due to ramp up in production at the Manesar plant. The sales in the mini segment registered a 7.9% mom growth primarily driven by the newly launched Alto 800. On a yoy basis, volumes grew strongly by 85.5% largely due to a low base of the corresponding period of the previous year when volumes were impacted by a strike at the Manesar plant.

MM maintained its strong volume momentum (growth of 13.2% yoy) aided by continued traction in the automotive segment (28.7% yoy) driven by Quanto as well as ramp-up in XUV5OO volumes. The four-wheeler pick-up segment too registered a strong growth of 26.4% yoy (14.9% mom). On a sequential basis, total volumes jumped by a robust 21.6% led by significant jump in tractor volumes which grew by 47.2% mom (down 7.1% yoy). Tractor volumes surprised positively probably due to festival season and late recovery in monsoons.

Two-wheelers and three-wheelers: Bajaj Auto (BJAUT) reported a sequential growth of 14.5% driven by festival demand, new launches – Pulsar 200NS and Discover 125ST and gradual revival in exports. HMCL registered better-than-expected volume growth of 3.3% yoy (30.7% mom) driven by festival demand and inventory correction. TVS Motor (TVSL) posted an in-line volume growth of 3.3% yoy (11.8% mom) driven by a strong 22.5% yoy (13.9% mom) growth in moped sales. On a sequential basis, motorcycle and scooter volumes grew by 13.9% and 9.8% respectively, benefitting from the festival demand.

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, MM and TTMT.

Source : Equity Bulls

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