Automobile Sector - Awaiting the festival cheer - Angel Broking

Automobile manufacturers reported a mixed performance in September with domestic sales maintaining their sluggish trend, while exports surprised positively mainly due to the low base of last year. While the trend across all the segments (except tractors) remained muted on a yoy basis; volume improvement was witnessed sequentially indicating an inventory build-up ahead of the upcoming festival season. Among the stocks in our coverage universe, Maruti Suzuki, Bajaj Auto and TVS Motor recorded a better-than-expected performance driven largely by strong growth in exports. We expect the volume performance to remain healthy in October as well, largely driven by the festival cheer.

Tata Motors (TTMT) continued with its poor sales performance as the commercial vehicle (CV) and passenger vehicle (PV) volumes maintained their declining trend following slowdown in industrial activity and weak consumer demand. Total volumes posted a sharp decline of 33.5% yoy (up marginally by 1.6% mom despite the upcoming festival season) with CV and PV segments registering a decline of 30.6% and 40.5% yoy respectively. Total domestic sales registered a decline of 34.7% yoy during the month.

Ashok Leyland (AL) registered lower-than-expected sales in September, with total sales posting a decline of 31.9% yoy on back of weak demand across the CV segments amidst slowdown in economic activity.

Maruti Suzuki (MSIL) registered a better-than-expected volume growth of 11.7% yoy driven by an unexpected surge in exports (up 180.8% yoy) aided by a weak base. Domestic sales posted a modest growth of 1.8% yoy led by strong growth in the compact (16.9% yoy) and super compact (42.9% yoy) segments. Utility vehicle sales however, declined 63.2% yoy (41.8% mom) due to competitive pressures (from Renault and Ford) and also due to slowdown in demand for diesel vehicles post the recent hike in fuel prices.

Mahindra & Mahindra (MM) registered a slightly better-than-expected volume growth of 2.2% yoy led by strong momentum in the tractor segment, even as the automotive segment continued to witness headwinds due to lack of new product launches and increasing competition in the utility vehicle space. The automotive segment registered lower-than-expected sales due to continued weakness in the PV segment, which witnessed a sharp decline of 20.5% yoy. The tractor segment however, witnessed a strong growth of 32.6% yoy led by strong domestic demand driven by good monsoons.

Two-wheelers and three-wheelers: Bajaj Auto (BJAUT) posted better-than-expected volumes, registering a growth of 2.1% yoy, driven largely by strong growth of 10.2% yoy on the exports front. Domestic sales however, declined by 2.6% yoy during the month. Three-wheeler (3W) sales too declined by 2% yoy as dispatches to Egypt continue to remain impacted. The company intends to launch new variants of the Discover around the festival season to boost sales. Hero MotoCorp (HMCL) registered lower-than-expected volumes with total sales reporting a marginal growth of 1.9% mom. However, on a yoy basis, sales grew by 15.8%, mainly due to the low base of last year. TVS Motor (TVSL) reported a better-than-expected performance with total sales posting a growth of 16.1% yoy, led by a strong growth in the two-wheeler and three-wheeler segments.
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 will 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, Maruti Suzuki, Mahindra & Mahindra and Tata Motors.

Source : Equity Bulls

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