Auto Sector - Silver lining in a dark cloud... - Antique

Industry overview

- Auto dispatch figures in April while expectedly weak (April is generally a weak month for dispatches after a strong March) and most companies/segments stuck to this trend. But there was one silver lining - tractors. M&M tractor volumes grew by a staggering 38% YoY (34% MoM) with volumes at 23k trashing estimates of 17-18k. This doesn't seem to be a flash in the pan, as industry growth too was around 28-30%. Even while taking cognizance of the fact that Navratra/Gudi Padwa was in April this year vs. March last year (hence adjusting these volumes with that of March as well), this was a healthy growth rate.

- Given that M&M has gained market share this month, we reckon that the lagging South market would have recovered a bit (M&M has a 50% market share in the South). This also bodes well for M&M's product mix/margins, as South is a higher HP market. We reiterate that there is strong upside to street FY14 tractor growth estimates of 5%, which coupled with an upcoming election year is a huge support for the stock. Notwithstanding near-term concerns of over-capacity, we pin our hopes on a decent monsoon this year (as forecasted) and expect the eventual up-cycle to kick-in towards end FY14. This should hopefully coincide with an uptick in infra activities and a resultant increase in tractor utilisation even on the non-farm side.

- For 2W players, Hero lost share this month again - volumes down 9.5% YoY vs. Honda volumes up 31% YoY (motorcycles up 51%/scooters up 16%). Bajaj domestic motorcycle volumes were flat YoY, but overall volumes were down 10% YoY on the back of a high base in exports. Notwithstanding attractive valuations (that too for a relatively superior business model), we don't like the 2W space in an easing rate cycle, and Honda's frantic expansion phase isn't helping. Hence we'd avoid both Hero and Bajaj for the time being.

- Our pecking order remains Maruti Suzuki and Tata Motors. For Maruti, while we don't expect much on the volume side this year, the much-awaited margin upgrade cycle is well underway. For Tata Motors, we believe that JLR is laying the foundation for strong growth in volumes over the next 2-3 years with its product life cycle at a very sweet spot. Also, the domestic business has much more scope for positive surprise than negative, which is a good place to be from a stock perspective. For M&M, while we are actually bullish on the tractor business now (after many quarters), the Auto division is not supporting our optimism, and hence we have a HOLD on the stock.

Source : Equity Bulls

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