Indian Automobile Sector in May 2013 - Slowdown continues

Domestic automakers continued with their poor run in May 2013, broadly on the expected line, due to slowdown in economic activity and negative consumer sentiments. The slowdown continues to be prominent in the medium and heavy commercial vehicle (MHCV), passenger car and two-wheeler segments. The utility vehicle (UV) and light commercial vehicle (LCV) segments, which so far had remained insulated from the slowdown, too have started witnessing demand pressures. 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 on the back of further easing of interest rates, festival demand and also due to favorable base effect.

Tata Motors (TTMT) continued with its poor performance in the domestic markets with total volumes registering a decline of 23.4% yoy (3.6% mom) to 49,304 units led by continued slowdown in the CV and PV segments. While CV sales witnessed a decline of 13.8% yoy (3.6% mom), PV sales reported a decline of 43.1% yoy (3.8% mom). The LCV sales of the company have slowed down considerably over the past couple of months.

Ashok Leyland (AL) reported broadly in-line volumes for May 2013 with total sales witnessing a decline of 2.9% mom to 7,267 units. Volumes continued to be impacted by the slowdown in the MHCV segment which led to a 6.1% mom decline in commercial vehicle sales (ex. Dost) to 4,932 units.

Maruti Suzuki (MSIL) reported lower-than-expected volumes at 84,677 units, down 14.4% yoy (13% mom), led by continued slowdown in domestic demand and macroeconomic uncertainty in key export markets. While domestic volumes declined 13% yoy (14% mom), exports posted a marginal growth of 1.1% mom (down 27.1% yoy). The compact (down 20.4% mom and 29.4% yoy), super compact (down 11.2% mom and 2.5% yoy) and utility vehicles (down 19% mom and 44.3% yoy) segments witnessed sluggish performance on account of continued slowdown in demand and also due to increasing competition.

Mahindra & Mahindra (MM) reported a slightly better-than-expected volume growth of 6.5% yoy (3.8% mom) to 67,086 units, driven by a strong growth of 24.2% yoy (1.8% mom) in the tractor segment. The automotive segment, however, witnessed a volume decline of 1.2% yoy during the month. According to MM's Management, the additional 3% excise duty for utility vehicles that was introduced in the Budget 2013-14 is impacting the sales of the segment. Three-wheeler sales too witnessed a decline of 6.8% yoy. The pick-up segment on the other hand witnessed a strong growth of 12% yoy (3% mom).

Two-wheelers and three-wheelers: Two-wheeler manufacturers in our coverage universe reported a mixed performance in May 2013. Bajaj Auto (BJAUT) registered lower-than-expected volumes, with units sold down 3.7% yoy and 1.4% mom, led by weakness in the motorcycle segment in the exports markets. Hero MotoCorp (HMCL) posted its highest ever monthly sales (11.8% mom; flat yoy) led by the off-take in the retail market driven by the marriage season in the North India and also aided by the recently introduced five-year warranty scheme on the entire product portfolio. TVS Motor Company (TVSL) reported in-line volumes with total volumes remaining flat mom (down 6.2% yoy) led by poor performance in the two-wheeler segment.

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 Ashok Leyland, Bajaj Auto, Hero MotoCorp, Maruti Suzuki, Mahindra and Mahindra and Tata Motors.

Source : Equity Bulls

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