Automobile Sector - Slowdown continues - March 2013 Sales Update - Angel Broking

Domestic automotive sales continued to slide in the month of March 2013, following a weak macro-economic environment, which continues to suppress overall demand. The weakness persisted across all the segments, resulting in a negative volume growth for our OEM coverage universe, with the only exception being Mahindra & Mahindra. The impact of the slowdown continues to be prominent in the medium and heavy commercial vehicle (MHCV), tractor, passenger car, and two-wheeler segments. Of late, sales in the utility vehicle (UV) and light commercial vehicle (LCV) segments too have started to taper off on a higher base of the corresponding previous year period. Going ahead, we expect volume growth to remain sluggish in 1HFY2014 due to high inventory levels and weak consumer sentiments. Nonetheless, we expect volumes to recover in 2HFY2014 led by further easing of interest rates, festival demand and also due to favorable base effect.

Tata Motors (TTMT) continued its downward trend (down 27.6% yoy), led by severe weakness in the domestic (down 27.2% yoy) and export (down 33.8% mom) volumes. On a mom basis though, sales surged 17.3%, mainly due to attractive incentives offered by the company in the passenger (up 16.7% mom) and commercial vehicle (up 17.4% mom) segments. While the LCV segment sustained its strong sales momentum, posting a growth of 12.5% yoy (12.2% mom); the MHCV and passenger vehicle (PV) segments reported a decline of 33.2% and 65.7% yoy respectively.

Ashok Leyland (AL) reported in-line volumes (up 39.6% mom), driven by Dost sales, which registered a strong growth of 44.1% mom. Total volumes however, registered a decline of 1.9% yoy on account of weakness in the commercial vehicle (CV) segment, which declined by 19.7% yoy.

Maruti Suzuki (MSIL) reported in-line volumes, primarily driven by growth in the Super Compact (up 22% yoy and 9.6% mom) and UV (up 8.9% mom) segments led by Dzire and Ertiga, respectively. While total volumes registered a strong 9.5% mom growth, driven by a strong performance across segments; on a yoy basis volumes declined 4.8%, largely due to slowdown in demand for entry level cars.

Mahindra & Mahindra (MM) reported an in-line volume growth of 7.7% yoy (10.4% mom), driven primarily by a 10.6% yoy (8.5% mom) growth in the automotive segment. The automotive segment growth was led by continued momentum in the PV segment (up 12.6% yoy), driven by the new launches - XUV5OO, Quanto and Rexton, and a strong growth of 17.1% yoy (13.5% mom) in the pick-up segment. The farm-equipment segment though reported a 0.3% yoy decline, which was in-line with our estimates, on account of a 2.3% yoy decline in domestic sales.

Two-wheelers and three-wheelers: Two-wheeler manufacturers in our coverage universe reported a disappointing performance yet again, led by sluggish demand on the back of weak consumer sentiments. Bajaj Auto (BJAUT) registered a steep decline of 10.2% yoy (9.4% mom) as domestic volumes posted a significant decline of 12.3% yoy. Hero MotoCorp (HMCL) posted extremely poor volumes with total sales registering a decline of 11.4% yoy (6.6% mom), due to slowdown in the domestic motorcycle industry. TVS Motor Company (TVSL) reported lower-than-expected volumes (a decline of 8.2% yoy), primarily on account of continued slowdown in the two-wheeler segment (down 9.9% yoy).

While the near-term environment continues to remain challenging for the automotive sector, we believe the long-term structural growth drivers for the 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, remain intact. We continue to prefer stocks that have strong fundamentals, high exposure to rural and export markets and command superior pricing power. We maintain our positive stance on Bajaj Auto, Hero MotoCorp, Maruti Suzuki, Mahindra & Mahindra and Tata Motors.

Source : Equity Bulls

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