BRICS on Wheels: Top picks Bajaj Auto and Tata Motors - BRICS Research

BRICS auto universe sales fell 8% yoy in July 2013 and tractors and three wheelers were the only segments to report growth - up 12% and 5% yoy respectively. On mom basis all segments declined tractor reported sharpest fall at 33%, followed by three wheelers 12% and CV 9%. Sharp fall in UV sales - M&M's PV sales fell 29% yoy, Maruti's UV sales fell 37% yoy and Tata Motors' UV sales declined 56% yoy (car sales were down 61% yoy). In two wheelers, Hero MotoCorp marginally grew by 0.7% yoy while Bajaj continued showing weakness reported sharpest fall - down 18.3% yoy while TVS declined by 4.7% yoy. While the expectation of a good monsoon supported tractor volume for Q1, but outlook segments like CVs remains bleak with poor IIP growth and no support from interest rates, but mom improvement is expected in PVs and two wheelers in August due to start of festive season.

Two-wheelers: Bajaj Auto reported sharpest decline in 2W, down 18% yoy, as exports also dropped this month by 12% yoy (June 2013 grew by 3.7% yoy). Sales of Hero were marginally up by 0.7% yoy. TVS' motorcycle grew by 8.5% yoy (June 2013 -3.7% yoy) and moped sales fell 18.6% yoy. TVS' total two-wheelers down 7% yoy. Honda Motors' total sales grew 20% yoy, of which motorcycle reported 35% yoy growth. While we estimate Hero's growth in scooter segment to be higher than that of Honda Motors, Honda's growth in motorcycle segment when sales of market leaders are falling would result in significant market share gain.

Passenger vehicles: Sales declined for seventh consecutive month post festival season, down16% yoy, as growth driver UV sales begun descent. Maruti's sales grew flattish1.3% yoy to 83,301 units backed by strong growth in Dzire segment (up34% yoy). Tata Motors' domestic PV sales saw a sharp fall of 60% yoy to 10,824 units, with sales of cars and UVs down yoy by 60.7% and 56%. M&M's PV sales fell29% yoy due to slower pick up of UVs in market.

Commercial vehicles: CV sales were down 20% yoy, as LCVs too declined and no longer buffered M&HCV fall. Ashok Leyland's sales were down 11% yoy - Dost sales were down 11.5% yoy, M&HCV declined 10.4%. Tata Motors' CV sales fell 22% yoy, as M&HCVs declined 28.5% and LCVs 19% yoy.

Bajaj Auto and Tata Motors our preferred bets Bajaj Auto: The stock trades at a P/E of 14.6x FY14E and 11.8x FY15E. At 16x FY14 earnings estimates (Rs1,723 per share) and valuing investments and cash at Rs400 per share, we arrive at a TP of Rs2,123. Maintain Buy. Tata Motors: We value Tata Motors' standalone business at Rs20 per share, 12x our FY14 core earnings estimate, and JLR at 8x FY14 earnings, in line with its peer valuation - after adjusting for capitalisation for product development- to Rs336 per share. We assign a 20% discount to investments and subsidiaries to arrive at a SOTP-based target price of Rs356 per share. We expect the stock to perform well and believe that it offers good potential for an upside. Maintain Buy.

Source : Equity Bulls

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