Delay in festive season causes September sales to skid for most…

Delay in festive season causes September sales to skid for most…

 September has been a good month for most of the auto companies (mainly the 4 wheelers) as they have started getting ready for the festive season lined up during the next two months. Dealers are stuffed with inventory to catch the festive demand. With new product launch M&M has clearly shown that a good product portfolio attracts demand defying macro hurdles, while Maruti Suzuki has posted an unexpected performance as Manesar plant is back to normal and has in fact started second shift of operation. However, macros still remain weak for Maruti and valuations look stretched. Tata Motors though posted a negative growth, its negativity was insignificant as LCV segment excelled again. On the other hand, 2 wheelers have posted a dismal show in September as inventory pile up fear has come true leading to lesser push to the dealers’ end. Also, the sales in September were down yoy as in last year, the festivals were spaced out and had already started in September.  Hero, Bajaj and TVS Motors all have posted a yoy decline, while the latter has posted a good sequential growth. We expect the next couple of months to be strong for the industry and somewhat improve the full year performance.

 Ashok Leyland – (TP- Rs 25, Neutral) – MHCVs dip, Dost excels

In September, ALL’s MHCV sales dipped by 12% yoy to 7,596 units, while the LCV Dost sold 3,027 units v/s 197 units last year when it was just launched. Including Dost, the total sales increased by 21% yoy and 13% mom to 10,623 units. This clearly signifies that amidst pain in the MHCV segment, LCVs are still holding the forte strongly for ALL. YTD, the company has posted a 33% growth to 57,327 units mainly on the back of the LCV Dost, which was launched only in October last year.

 Bajaj Auto – (TP – Rs 1825, Neutral) – Exports recovery on track

Bajaj Auto’s September sales came 14% down on yoy basis to 3,60,152 units, while there was a mom improvement of 4%. Motorcycle sales de-grew by 15% yoy despite the new Pulsar 200 NS and Discover 125ST putting up a good show ( sold 9,000 units and 35,000 units respectively) in this month. Exports are seeing a mom recovery while on yoy basis the dip is narrowed to just 6% as Bajaj Auto sold 133,222 units with Sri Lankan and Egyptian markets almost up to their normal monthly run-rate. We expect full recovery from October onwards in exports and negative growth in domestic market to correct somewhat from the upcoming couple of festive months.

 Hero MotoCorp – (Under Review) – Solid dip

HMCL’s September sales nosedived by 26% yoy and 9% mom to 4,04,787 lakh units in September ahead of festive season which we believe is an attempt to clear off inventory and newly start stuffing the dealers with fresh inventory along with new models to catch the festive demand. Also the management has cited this dip as the current sentiment in the 2W industry. We expect demand to get back in full form from October onwards.

 Mahindra and Mahindra – (TP- Rs895, Neutral) – Consistent auto business, FES sees month on month uptick

M&M sold 48,342 units in the auto segment, 10% growth yoy and a 5% mom growth. Passenger UV sales in the month grew by 22% yoy to 23,808 units, which was a 15% mom growth. The UV sales growth came on the back of ramp up in the production of XUV5oo and a pan India launch of the same in June. Also the compact SUV Quanto was launched which has received a warm response, as its order backlog is at 3,000 vehicles currently. 4W pick-up segment which includes Gio, Genio and Maxximo posted a 7% growth yoy as the LCV segment continued to grow at a strong pace indicating strong demand in the sub 1 tonne market despite a slowdown in the bigger version of the CV sector. 3Ws went back to negative growth after a strong August, as sales declined by 17% yoy. Exports grew by a 3% yoy to 3,079 units as XUV5oo was launched in South Africa in August and traction was seen from geographies like Chile, Africa, Middle East and the US. FES segment posted a better than expected performance as the company sold 20,085 units in September which was a 24% yoy decline, however it was a whopping 52% rise mom. Although YTD FES segment has fallen by 7%, we expect second half to show some improvement on expectations of a strong rabi crop.

 Maruti Suzuki – (TP – Rs 1,123, Underperformer)-Surprising stuff!!

Maruti Suzuki (Maruti)‘s sales in this month came at 93,988 units up by 74% mom and 10% yoy which was much better than our as well as market’s expectations.  In a scenario where petrol prices are moving up, the bread and butter segment, the mini segment of Maruti comprising Alto, Wagon R and A Star grew by 4.9% yoy as the company is preparing for the festive season, while the company is providing >10% discounts on Alto and Wagon R. The compact hatchback segment comprising Swift, Ritz and Estillo has seen a fall of 9.7% yoy as diesel prices have seen a hike in the month while on the other hand, production at Manesar is slowly getting back to normal.  Dzire model which had been a star performer for Maruti succumbed to the lockout and declined by 60.7% yoy in August. But in September it came back to its old glory as it grew by 24.3% yoy. Vans segment grew in the positive territory after several months, as it went up by 7.5% yoy as vehicles such as Omni and Eeco showed some improvement. MPV segment, backed by the newly launched Ertiga sold 7,224 units thus maintaining its high demand base of ~7,000 units. SX4 model grew by about 46.9% yoy although the model has seen strong pressures over the past year as competition from Vento, City and Verna has increased. Exports looked weak this month again as they fell by 23% yoy. Although September sales were strong, and the next couple of months will continue to remain so, the company will still underperform on a full year basis as fuel prices are zooming up and interest rates are yet to cool off. At current price point, the stock looks overvalued to us.

 Tata Motors – (TP- Rs298, BUY)- Numbers above expectations

September sales for the company were lower by 4% yoy, while on mom basis, it went up by 5%. CV sales grew by 5% yoy, out of which LCV sales were up by 19% yoy signifying LCV segment’s defiance of the macro uncertainties. New launches like the variant of Ace Zip led to the growth in LCV. MHCV sales however slipped by 16% yoy as macro weaknesses continued to trouble in the month. PV segment sales fell by 18% yoy while an improvement is expected in festive season. Nano segment grew by 87% yoy to 5,491 units, while it was an 15% decline on a mom basis.  Indica range fell by 23% yoy while Indigo products posted 26% decline yoy. Utility segment sales were by 15% yoy.

 TVS Motor – (TP- Rs 32, Underperformer)- Aberration!

TVS sold 1.71 lakh units in September which was better than our expectations. This was a 10% mom growth and a de-growth of 22% yoy. Motorcycles de-grew by 29% yoy to 63,832 units, while scooters de-grew by 28% yoy to 40,055 units. 3 Wheelers improved drastically as it touched record high of 5,005 units a growth of 36% yoy.  We believe this to be a 2-3 months affair on account of festive season and the stock would in our view  remain an underperformer.

 

Weak monsoon further dampens 2W demand

Weak monsoon further dampens 2W demand

 August is traditionally a weak month due to monsoon. This year, the overall economy is on a weak wicket and monsoon has been a dampener due to which customers have been cautious while buying a vehicle. This sentiment was clearly reflected in the August numbers as two wheeler makers like Hero are facing the brunt of heavy inventories at the dealers’ ends as the 2W industry is softening. TVS expectedly underperformed, while Bajaj’s weak domestic business got somewhat offset due to exports improvement. On the 4wheeler side, Maruti’s sales came below expectations due to the lockout at Manesar, while M&M(Auto business) and Tata Motors performed as per expectations. We like Hero Motocorp from this level, followed by Bajaj Auto as we see an improvement in their numbers in the ensuing months, especially festive months of September-November. We continue to remain negative on Maruti and TVS, while Tata Motors and Ashok Leyland remain our top pick. M&M has run up a lot, due to which we see a limited upside from current levels.

 Ashok Leyland (BUY, T.P – Rs 29)- Inline performance better than the closest peer

Ashok Leyland (ALL)’s MHCV sales dipped by 8.6% yoy to 6,597 units while Dost sales came in at 2,835 units. On the back of strong performance of Dost, total volumes went up by 30.4% yoy to 9,432 units. On mom basis, MHCV sales declined by 5.5%, while Dost sales went up by 1.1%. Total sales volumes were down by 3.6%. On a YTD basis, MHCV sales are down by just 1.5% which looks much better than its peer and CV market leader Tata Motors, whose MHCV sales have declined by 20.7% YTD. This also indicates that ALL has won market share in the CV segment and discounting is much higher than Tata Motors.

 Bajaj Auto (BUY, T.P. – Rs 1,776) – Bajaj Auto’s sales numbers in the month of August came in at 3,44,906 units, a de-growth of 9.9% yoy and flattish mom growth. Motorcycle sales de-grew by 10% yoy to 3.04 lakhs. 3W segment declined by 9.2% yoy, while improved significantly by 14.9% mom to 40,544 as Sri Lanka and Egypt have shown some recovery. Total exports declined by just 4.8%, while they improved by 4.8% mom. As exports are seen normalizing as per expectations,  the company expects the new launches in the motorcycle segment to revive their domestic business from festive season onwards.

 Hero Motocorp (BUY, T.P. – Rs 2,187) – The dent which was seen in the company’s July performance deepened as sales in August declined by 11.9% yoy and 8.3% mom to 4,43,801 units which signals lower demand in the 2W industry and inventory pile up at the dealers’ ends as demand is rural India is also shrinking in line with the weak monsoon. We expect the sales to bounce back during festive months of September-November.

 Mahindra and Mahindra – (TP- Rs828, Outperformer) – Auto business support the flagging FES volumes

M&M sold 46,226 units in the auto segment, 22.7% growth yoy and a 1.8% mom decline. Passenger UV sales in the month grew by 39.4% yoy to 21,831 units, which was a 1% mom fall. The UV sales growth came on the back of ramp up in the production of XUV5oo and a pan India launch of the same in June. 4W pick-up segment which includes Gio, Genio and Maxximo posted a 13.6% growth yoy as the LCV segment continued to grow at a strong pace indicating strong demand in the sub 1 tonne market despite a slowdown in the bigger version of the CV sector. 3Ws showed some improvement as the sales remained flat yoy after several months of negative growth. Exports grew by a whopping 56.1% yoy to 3,010 units as XUV5oo was launched in South Africa and traction was seen from geographies like Chile, Africa, Middle East and the US. FES segment weakened significantly as M&M sold just 13,234 units, which was a 17.3% dip yoy and 20% mom dip as monsoon in the southern peninsula of India was deficient and in many of the districts in Maharashtra and Karnataka, some of the major markets of M&M was declared a drought.

 Maruti Suzuki – (TP – Rs 1,123, Underperformer)-Lockout + Petrol underperformance

Maruti Suzuki (Maruti)‘s sales in this month came at 54,154 units as compared to 91,442  units, down by 40.8% and 34.1% qoq as lockout jolted the production from their Manesar plant which produces the high demand diesel vehicles like Swift and Dzire. This was well below our expectations of 60,000. In a scenario where petrol prices are moving up, the bread and butter segment, the mini segment of Maruti comprising Alto, Wagon R and A Star de-grew thick and fast by 41.2% yoy, despite the company providing >10% discounts on Alto and Wagon R. The recent unfortunate turn of events at the Manesar plant which resulted into a lockout at this plant for almost the full month of August led to a 62.2% decline in the diesel segment yoy. Dzire model which has been a star performer for Maruti succumbed to the lockout and declined by 60.7% yoy. Vans segment continued to de-grow by 7.3% yoy as vehicles such as Omni and Eeco underperformed. In the MPV segment, the newly launched Ertiga sold 6,883 units thus maintaining its high demand base of ~7,000 units. SX4 model declined heavily by about 76.4% yoy as there was dearth of diesel engines and competition from VW Vento and Honda City hit its performance. Exports looked weak this month again due to the lockout as they fell by 72% yoy. We do not expect the September sales also to post a strong growth as although the Manesar plant has re-started under tight security, it is producing only 150 units per day which will get slowly ramped up.

 Tata Motors – (TP- Rs283, BUY)- Volumes as per expectations

August sales for the company were higher by 12.1% yoy, while on mom basis, it fell by 3.1%. CV sales grew by 4.9% yoy, out of which LCV sales were up by 15.6% yoy signifying LCV segment’s defiance of the macro uncertainties. New launches like the variant of Ace Zip led to the growth in LCV. MHCV sales however slipped by 12.1% yoy as macro weaknesses continued to trouble in the month, however on mom basis it jumped by 14.8% thus showing some improvement in MHCV segment. PV segment sales grew by a handsome 32% yoy while it slipped by 15% mom. Nano segment grew by 441% yoy to 6,507 units, while it was an 18.6% growth mom, thus indicating success of the 2012 model of Nano, which is getting received very well in the market. Indica range dominated by diesel portfolio expanded by 5.3% yoy while Indigo products posted 29% decline yoy and 46.8% mom. Utility segment sales grew by 38% yoy while it declined by 9.9% mom.

 TVS Motor – (TP- Rs 36, Underperformer)- Reeling under competitive pressures and slowdown

TVS sold 1.55 lakh units in August which was very much in line with our expectations. This was a 4.1% mom and a de-growth of 20% yoy. Motorcycles de-grew by 30.9% yoy and 0.6% mom, while scooters de-grew by 26.9% yoy and 6.6% mom. 3 Wheelers improved mom performance by 18.4%, while yoy they declined by 17.1%.  In line with this, we continue to be negative on the stock as intensifying competition, high percentage of mopeds in the volumes, higher advertising expenses and weak product portfolio and bleeding subsidiary are weighing too much on the stock. Also the 2W industry is seeing some softness as well, which is weighing down on TVS a bit too much as compared to its peers.

 

Nifty likely to Retest December Lows of 4530

Nifty likely to Retest December Lows of 4530

Once again there is a higher possibility for the Indian indices to test December lows, as small relief rally seems to be over with Nifty failed efforts to show the resilience above 4950 levels. The support zone of 4770-4830 is likely to be tested once again in the 1^st half of the June series and closing below 4770 will confirm more bearishness and a possibility of retesting December lows.

On the expiry day, selling of INR 1251 crores in index futures and buying of more than INR 1700 crores in options in last few days adds warning signals before the showdown. The rollovers also shows lack of confidence as Nifty rollovers were below 60% in May expiry for the 1^st time in over a year. The month of May exactly performed as per one of the famous saying of stock market i.e. “SELL IN MAY AND GO AWAY” as Nifty lost more than 6% to close just marginally above 4900 levels against the previous month close of 5248.

The month of May was clearly the one to forget for not only the Indian markets but also for Indian economy, as Rupee ended the month at new life time low above 56 levels against USD. A small pull back to 54.50 cannot be ruled out, in which timeframe Nifty futures may see a small pull back rally up to 5085 levels, where Nifty will face very strong resistance, but rupee looks far away from the bottoming out and looks set to achieve another long term target of 58 levels in next few months against USD.

Nifty O.I. stands at 0.91. For the June series, highest open interest buildup is seen at 4500 Put and 5000 call, adding more importance to 4770 levels on closing basis for Nifty, below which selling pressure can increase to reach the eventual target of December lows.

Sectors likely to underperform in the next 2 months would be automobile and infrastructure sector. Stock specifically significant correction can be seen in stocks like TATA MOTORS, BAJAJ AUTO, MARUTI AND HEROMOTORS in the month of June.

PVs and CVs reel under the May heat!

PVs and CVs reel under the May heat!

The month of May, which is generally a weak month for auto sales was this year impacted even more due to the overall negative sentiments arising from the global as well as domestic worries. Over and above, hike in petrol prices tarnished the last week of sales of the companies. Auto sales of passenger vehicles as well commercial vehicles companies like Maruti Suzuki and Tata Motors respectively witnessed weakness, while 2 wheeler segment’s weakest performer TVS continued its dismal run. Hero Motocorp was an outperformer putting a stellar show once again thus enforcing our confidence in this stock. M&M put up a good show on the auto side especially on the UV side, while tractors sales came in a bit higher than expectations. On the PV side, we believe the first half of the year will be slightly tepid, while any further cut in interest rates, new model launches and diesel engine capacity ramp up will help the auto industry to grow mainly in the second half of the year. CVs will be driven mainly by LCV segment while MHCV will be a proxy to the economy of the country.

Hero Motocorp – (TP- Rs 1,996, Outperformer)- Bucking the trend

Hero posted a growth of 1% mom and 11% yoy in May at 5.56 lakh units. This was above our expectations as April and May are both weak, but Hero has bucked the trend defying any slowdown or sluggishness in the domestic two wheeler industry. We believe that competition from Honda is being overhyped as Honda’s 4mn capacities will have only 50% of motorcycle capacities(2mn) v/s Hero’d capacities of >7 mn thus providing Hero a huge margin over Honda. Before causing any trouble to hero, Honda will compete with Bajaj and TVS, by the time which Hero will be taking up their capacities to even higher levels through new capacity build up. Therefore among 2 wheelers, we prefer Hero over its peers also due to its market leadership position, strong presence in the executive segment, widespread dealership network and array of strong products.

Mahindra and Mahindra – (TP- Rs750, Outperformer) – Better than expected

M&M sold 43,988 units in the auto segment, 8% growth yoy which was a tad bit higher than our expectations for M&M. Passenger UV sales in the month grew by 31% yoy to 20,211 units, which was a slight decline mom. The yoy sales growth came on the back of the new launch of XUV5oo. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 33% growth yoy as the LCV segment continued to grow at a strong pace indicating expansion in the total sub 1 tonne LCV market. Exports grew by a whopping 87% yoy to 4050 units as XUV5oo was launched in South Africa and traction was seen from geographies like Chile and the US. FES segment’s under performance over last 6 months took a breather as they posted better than expected numbers in May at 19,016 units which are still showing a growth of just 1% yoy, nevertheless it was a surge of 18% mom. Management expects second half for FES to be better than 1st half of FY 13 and grow by 5-6% in FY13.

Maruti Suzuki – (TP – Rs 1,300, Neutral)- Petrol portfolio adversely impacted despite higher discounts…..

Maruti Suzuki (Maruti)‘s sales in this month came at 99,884 units as compared to 104,073  units, 5% fall on yoy basis. In a scenario where petrol prices are moving up, the bread and butter segment, the mini segment of Maruti comprising Alto, Wagon R and A Star de-grew by 29% yoy, despite the company providing >10% discounts on Alto and Wagon R. The compact segment comprising Swift, Ritz and Estilo also showed a slowdown of growth at 14.7% v/s 43% posted in April on seasonality and sentiments. However, we expect this segment to get back to its previous month numbers of >20,000 as demand for diesel vehicles increases. Vans segment de-grew by 39% yoy as vehicles such as Omni and Eeco underperformed due to some vendor issues for manufacturing of Eeco. Also Wagon R production took a hit due to this reason. In the SUV segment, the launch of Ertiga led to s strong growth to 7,734 units v/s 1100 units yoy. Dzire model grew handsomely by 63.8% as the new diesel model consistently performed. SX4 model declined heavily by about 85% yoy as there was dearth of diesel engines and competition from VW Vento and Honda City hit its performance. Exports took a hit 11% yoy, as 1,500 units of exports were held up in transit and will impact sales positively in June. Any further rate cut by the central bank of India may have a positive impact on the volumes. Restriction on the expansion of diesel engine capacities may lead to a cap on the diesel engine sales going forward. Also yen appreciation and fuel price hike along with doling out of higher discounts on petrol cars will be impacting the stock negatively.

Tata Motors – (TP- Rs304, BUY)- Subdued show in line with our expectations

May sales for the company were higher by 3% yoy, while on mom basis, they were up by 7% on a low base of April. CV sales grew by 7% yoy, out of which LCV sales were up by 26% yoy signifying LCV segment’s defiance of the macro uncertainties. New launches like the variant of Ace Zip led to the growth in LCV. MHCV sales however slipped by 20% yoy as macro weaknesses continued to trouble in the month. PV segment sales grew by 6% yoy after a fall of 7% in April driven by Nano which grew by 31% yoy to 8,507 units, while other PV products posted declines. Utility segment sales were flat at 3,132 units. Indigo range sales were down by 20%.

TVS Motor – (TP- Rs 36, Underperformer)- Reeling under pressure

TVS sold 1.76 lakh units in May slightly better than estimate. This was a 1% mom and a de-growth of 5% yoy. Motorcycles de-grew by 15.2% yoy, while scooters grew by 1.7% yoy. 3 Wheelers have continued their underperformance as they declined 27.7% yoy to 2,920 units. In FY 13, TVS expects  to grow at 8-10% against 7.9% in FY 12. With rising competition in the scooter segment from Honda, M&M and Suzuki, slowdown in motorcycle segment and structural weakness in 3 Wheeler segment , we continue to believe that this expectation is optimistic and TVS will be a laggard in the 2W segment.

Wait for a reversal signal – patience pays

Wait for a reversal signal –  patience pays

The Nifty ended in deep red near its important support level on Wednesday as weak cues from global markets and the depreciating rupee weighed on sentiment.
The Nifty has been moving downward for more than a year. The downtrend reversed in January this year when the index rallied smartly from 4,530 to 5,630 in a span of just two months.
“At current levels, chart patterns looks extremely bearish and one needs to remember that bottoms are formed in such gloomy situations. “However, at this stage there is no such indication of a bottom being formed but, indices remaining in a range for few days at these levels could make case of some early signals of a bottom formation. From a trader’s perspective,  the view is that the stage is set up for a bounce bank if the Nifty sustains above 4,960 levels and the Sensex above 16,400.

Based on long term charts 4750 to 4800 remains very strong support and Nifty is unlikely to fall below this in absence of any further negative news flows.

Bank nifty has seen low of 9000 and momentum traders need to watch 9500 levels very closely as a move above this will be very clear indication of  a positive trend building up. There can be very frenzied squaring of short position seen once Bank Nifty sustains the above mentioned levels. In this depressed period,  systematic trades with a very strict stop loss should only be initiated however, medium to long term investment can be initiated on dips on a regular intervals in small parts. Looking from a long term perspective If it is about risk-reward, I think this zone provides a favourable risk reward ratio.

……All Fall Down

……ALL FALL DOWN

We have witnessed an extremely topsy-turvy first 6 months of year 2012. First two months the markets saw a stupendous rally mitigating for the losses of full year 2011. March was eagerly awaited due to Budget and the crucial RBI policy, however, after that the months which followed have seen a sideways action for the markets, and off late we are seeing the markets, especially the stocks rather than the indices crumbling.

Technically, the markets have undergone severe damage leading to a sea-change in the outlook going ahead. The benchmark indices have closed below their crucial 200 DMA levels, as well as breached the key retracements levels of 61.8%. Interestingly, the stocks which called the shot few months back, are struggling to find any sort of support in this market.

But as we know, history is history, what is more important is the current scenario and the outlook going ahead. Jumping to the last few weeks of trading, I think one very important factor which is developing, is the fall of all asset classes across the board. Take global equity indices, US or European, or Crude Oil, Gold / Silver, etc., all of these are witnessing a sharp correction. I think, this is a clear case of risk aversion happening across the global investors, which is leaving a deep impact on the equity markets especially.

With Oil correcting by more than 10%, it provides a favourable backdrop for RBI to cut rates. If rate cuts ensue in the next few policy meetings, markets could provide the much necessary boost.

QE3, seems to be now the talk of the Wall Street, with June meeting eyed for any chance by the Fed to inject liquidity into the system.

If it is about risk-reward, I think this zone provides a favourable risk reward ratio to investors, looking from a long term perspective.

Trading has been on lacklustre in the last few weeks, however once the markets stabilises and volatility subsides, a short term reversal can most likely happen.

As of immediate short term, it is a wait and watch, however, I believe one should look at stock specific opportunities to start building a robust portfolio for rough times ahead.

Trade with strict stop losses, and more important is trade light.

In such times, I believe one should adopt a strategy of “ Live today, so that you can make a killing tomorrow”. This means, trade light in this market, and once a favourable trend begins one can start investing in good volumes.

 

 

April – A mixed bag in Motown

April – A mixed bag in Motown

The month of April witnessed weakness in auto sales for companies like Maruti and Tata Motors, while 2 wheelers like Hero and Bajaj reported good sets of numbers. M&M put up a good show on the auto side, on the new launch of XUV 500. Rise in fuel prices and excise duty hikes on national as well as state levels led to hampering of sentiments, while interest rate cut of 50 bps had some positive impact. CV sales were the most affected during the month as macros posted weak set of numbers (IIP). ON the PV side, we believe the first half of the year will be slightly tepid, while any further cut in interest rates, new model launches and diesel engine capacity ramp up will help the auto industry to grow mainly in the second half of the year. Strong two wheeler sales of the two market leaders was a big surprise as the street expected weakening of rural growth to impact two wheeler sales negatively. The growth in 2wheeler sales indicates resilience on their part.

Hero Motocorp – (Under review)- Surprised one and all

Hero posted a growth of 4% mom and 7% yoy in April at 5.51 lakh units. This was above our expectations as April is generally a weak month when compared sequentially defying any slowdown or sluggishness in the domestic two wheeler industry. However, competition from Honda, new launches from Bajaj and slowdown in the rural markets remain overhang on the stock. Still among 2 wheelers, we prefer Hero over its peers due to its market leadership position, strong presence in the executive segment, widespread dealership network and array of strong products.

Bajaj Auto (TP – Rs 1,620, Neutral)- Weakness ahead

Bajaj posted 4% yoy growth in April which seems not too impressive, however it grew by 14% on mom basis which is a good start for a new year. Motorcycles grew by 6% yoy while 3 wheelers de-grew by 13% yoy. Export growth was at 7% Exports of the company jumped to 44% of sales as compared to 34% in March. Going forward, we believe that the company will continue to face increased competition from Hero and Honda in the domestic markets and new launches within the Discover and Pulsar range may cannibalize its existing portfolio. On the export side, Sri Lanka (20% of exports) increasing import duties on 2W and 3W and Indonesian auto manufacturers projecting de-growth for FY 13 may impact Bajaj Auto’s performance. However, management guided for a 6% growth in Q1 FY13 and to sell more than 3 lakh motorcycles per month this year. They also expect to grow at market growth rate this year.

Mahindra and Mahindra – (TP- Rs783, BUY) – Auto segment strong, FES segment subdued…

M&M sold 40,719 units in the auto segment, a 27% growth yoy which was a good number for M&M. Passenger UV sales in the month grew by 33% yoy to 20,558 units, which was a slight decline mom. The yoy sales growth came on the back of the new launch of XUV500. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 37% growth yoy as the LCV segment continued to grow at a strong pace indicating expansion in the total sub 1 tonne LCV market. Export declined significantly to 1,420 units. Farm Equipment Segment (FES) which had posted a very robust growth of 71% in October almost halved in November, and moved down even further to 15,315 units in December and continued to go down with a negative growth of 6% yoy in January. This negativity went further deep in February, as M&M reported 20% dip in this month on issues of increasing delinquencies on the agri credit, slowdown of farm yields and overall tepid growth in Indian economy. However, March showed some revival in tractor sales on a mom basis, as they sold 17,405 units, almost a 15% growth mom. In April, again the segment showed slight weakness as sales fell by 8% mom and 13% yoy.

Maruti Suzuki – (TP – Rs 1,300, Underperformer)- Performance lower than expected

Maruti Suzuki (Maruti)‘s sales in this month came at 100,415 units as compared to 97,155  units, 3.4% growth on yoy basis. In a scenario where petrol prices are moving up, the bread and butter segment, the mini segment of Maruti comprising Alto, Wagon R and A Star de-grew by 26.4% yoy. The compact segment comprising Swift, Ritz and Estilo showed a solid growth of 43% as demand for diesel cars is moving northwards on the backdrop of gap between petrol and diesel prices increasing and the production of high demand new Swift getting back to normalcy of >17,000 units per month.  Vans segment de-grew by 10% yoy as vehicles such as Omni and Eeco underperformed. In the SUV segment, the launch of Ertiga led to s strong growth to 5,593 units v/s 217 units yoy. Dzire model grew by 31.5% as the new diesel model consistently performed. SX4 model declined heavily by about 70% yoy as there was dearth of diesel engines. Exports grew by just 1.5% yoy, while de-growing by 32% mom to sell 10,160 units. Any further rate cut by the central bank of India may have a positive impact on the volumes, while petrol price hike will impact sales adversely. State level levy of extra excise duty on cars will impact sales in those states in coming months(eg:- Maharashtra). Restriction on the expansion of diesel engine capacities lead to a cap on the diesel engine sales going forward. Also yen appreciation and fuel price hike along with doling out of higher discounts on petrol cars will be impacting the stock negatively.

Tata Motors – (TP- Rs318, BUY)- Negative surprise

April sales for the company were lower by 7% yoy, while on mom basis, they fell by a huge 40%. CV sales dropped by 6% yoy, out of which LCV sales were up by 9% yoy signifying LCV segment’s defiance of the macro uncertainties. New launches like the variant of Ace Zip led to the growth in LCV. MHCV sales however slipped by 29% yoy as macro weaknesses surfaced in the month. PV segment sales fell by 7% yoy which was arrested upto some extent due to Indica range which was up 63% yoy on new launch of Indica Vista launched a quarter back. Utility segment sales went up by 5% yoy. Indigo range sales were down by 31%. Nano sales declined to 8,028 units which was a decline of 20%. Although the domestic business has underperformed this month, on a broad basis, it has performed well in the past and the contribution of domestic business to the total profits is just 20%, which leads us to maintain BUY on Tata Motors as JLR business is outperforming.              

TVS Motor – (TP- Rs 50, Neutral)- In line with expectations

TVS sold 1.74 lakh units in April in line with our subdued estimate. This was a de-growth of 4% mom and a growth of 4% yoy. Motorcycles de-grew by 4% yoy, while scooters grew by 2% yoy. 3 Wheelers have continued their underperformance as they declined 19% yoy to 2,961 units. In FY 13, TVS expects  to grow at 8-10% against 7.9% in FY 12. With rising competition in the scooter segment from Honda, M&M and Suzuki, slowdown in motorcycle segment and structural weakness in 3 Wheeler segment , we continue to believe that TVS will be a laggard in the 2W segment.

4-Wheelers marching ahead in March…

4-Wheelers marching ahead in March…

The month of March witnessed an expected surge in auto volumes as pre budget buying was prevailing in the first half of the month and since there was no negative news for diesel cars except the expected hike of 2% in the excise duty across the board, the cheer continued in the second half as well. Seasonally a strong month – March saw companies like Tata Motors, Maruti and M&M (our top picks in that order) post all time high monthly sales numbers with each of their segments performing well. With Tata Motors touching the magic figure of 1 lakh, Maruti crossing its pre strike volume number and M&M with its new launches helping them to put up a record high in UV sales the auto industry saw a firm uptick. On the other hand, TVS continued its disappointment, signaling that Honda is taking its toll on their performance . Each of their segments saw a sharp fall in growth- thus showing fundamental weakness. TVS’s peers also posted a subdued show, however better than TVS. 2 wheeler companies have given a word of caution stating that they are still in a slowdown mode and there is nothing motivating to predict a bullish overtone to the 2 wheeler space in the coming year as of yet.

 

Ashok Leyland (TP – Rs30, Neutral)

Ashok Leyland’s March sales exceeded our expectations, as they sold 14,285 units, a growth of 17% yoy. This constituted the newly launched LCV Dost which sold 2,211 units, while the actual MHCV volumes declined by 0.8% yoy to 12,074 units. However, MHCV sales grew by 27% mom and LCV sales grew by 40% mom. The total sales surpassed Ashok Leyland’s full year target of 1 lakh units. In FY 12, the company grew at a pace of 8.4%. The company sold 94,416 MHCVs and 7,593 LCVs in FY12. Improvement in South Indian markets will remain a key to success in FY13.

 

Bajaj Auto (TP – Rs 1,620, Neutral)

Bajaj posted just 9% yoy growth in March and a 4% dip on mom basis. Motorcycles grew by 10% yoy while 3 wheelers grew by 4% yoy. Despite March being a strong month for auto industry, Bajaj like its peers posted a soft performance, below our expectations. In FY 12, the growth was 14%, while the company estimates to grow at 15% in FY 13, which we believe is a bit too optimistic considering the difficult operating environment in the midst of a slowdown. Exports of the company will also feel the heat with Sri Lanka (20% of exports) increasing import duties.

 

Hero Motocorp (TP- Rs 2,000, Neutral)

Hero posted a flattish growth in March at 5.28 lakh units, while on a yoy basis it was a growth of just 2%. The subdued performance of two wheelers signifies slowdown and sluggishness in the domestic two wheeler industry. However, competition from Honda may eat up the market share of TVS ( which has already started to happen), followed by Bajaj and then compete with Hero as the gap between the scale of Hero and Honda is very wide. Hence, we believe that within 2 wheelers, Hero is one of the stocks to look at.

 

Mahindra and Mahindra – (TP- Rs783, BUY) – Auto segment sails through, FES segment recovers…

M&M sold 47,001 units in the auto segment, a 25% growth yoy which was a stellar figure for M&M, a record high. This performance was better than our expectations. Passenger UV sales in the month grew by 30% yoy to 21,257 units, which was 14% growth mom. The strong sales on the recently launched XUV 500 and the new Xylo led to this strong growth. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 28% growth yoy as the LCV segment continued to grow at a strong pace indicating expansion in the total sub 1 tonne LCV market. Verito sales were strong in the month at 1,763 units up a mammoth 73% yoy v/s 1,619 units in February. Export sales moved up by 31% yoy  to 2,659 units, however, this was flattish mom. Farm Equipment Segment (FES) which had posted a very robust growth of 71% in October almost halved in November, and moved down even further to 15,315 units in December and continued to go down with a negative growth of 6% yoy in January. This negativity went further deep in February, as M&M reported 20% dip in this month on issues of increasing delinquencies on the agri credit, slowdown of farm yields and overall tepid growth in Indian economy. However, March showed some revival in tractor sales on a mom basis, as they sold 17,405 units, almost a 15% growth mom. However, yoy they declined by 12%.  In FY 12, the company’s auto sales grew by 28%, while FES ended the year with just 10%, v/s 17-18% projected growth by management in October.

 

Maruti Suzuki – (TP – Rs 1,475, BUY)- Performance in line with expectations.

Maruti Suzuki (Maruti)‘s sales in this month came at 125,952 units as compared to 121,952  units, 3.3% growth on yoy basis, while on mom basis it was up by 6%. In a scenario where petrol prices are moving up, the bread and butter segment, the mini segment of Maruti comprising Alto, Wagon R and A Star de-grew by 10% yoy. The compact segment comprising Swift, Ritz and Estilo showed a solid growth of 23.6% as demand for diesel cars is moving northwards on the backdrop of gap between petrol and diesel prices increasing and the production of high demand new Swift getting back to normalcy of >17,000 units per month.  Vans segment grew by 146% yoy as the pre-launch dispatches of Ertiga started in March itself. Only the SX4 model faced a huge decline of about 58.1% yoy as there was dearth of diesel engines. Exports grew by 14.7% yoy, while growing at 17% mom to sell 13,228 units with non European geographies like Asia-Pacific, CIS countries and Africa showing growth momentum . In line with the new Dzire model launched in February, it has started creating a base of 15000-16000 units per month as it grew 60% yoy to 16,541 units in March. Any rate cut by the central bank of India may have a positive impact on the volumes, while petrol price hike will impact sales adversely. Status quo maintained on diesel cars taxation is a good news for Maruti and the cheer is expected to continue in coming months though 2% excise duty hike getting passed on have made cars costlier. State level levy of extra excise duty on cars will impact sales in those states in coming months(eg:- Maharashtra). Expansion of diesel engine capacities will help the company to cater to the bludgeoning demand for diesel cars. In FY 12, Maruti’s sales de-grew by 10.8% on competition, fuel price hikes, interest rate increase and strikes at the Manesar plant.

 

Tata Motors – (TP- Rs318, BUY)- Record high!

March sales for the company were at a record high of 100,414 units, 20.5% up yoy and 9% up mom. CV sales grew by a healthy 16.7% yoy, out of which LCV sales were up by a healthy 37% yoy signifying LCV segment’s defiance of the macro uncertainties. New launches like the variant of Ace Zip led to the growth in LCV. MHCV sales however slipped by 5.8% yoy while growing by 13.7% mom. PV segment sales have started to pick up since last quarter as they grew by 33.6% yoy on strength coming from Indica range which was up 64.6% yoy mainly on prebuying effect of budget and on new launch of Indica Vista launched a quarter back. Utility segment sales went up by 40.5% yoy. Indigo range sales were also up by 15% after underperforming in February. Nano sales were the star performer as they grew smartly up at 10,475 units, 20.3% up yoy and 13.6% mom. Continued strength in CV business aided by LCVs and robust PV sales have led to a continuous solid growth in volumes of the company. Total FY 12 growth of the company has been 13.3%.              

 

TVS Motor – (TP- Rs 50, Neutral)- Seasonally up… though the broad picture remains negative

TVS sold 1.83 lakh units in March in line with our subdued estimate. This was a de-growth of 4% yoy and a growth of 6% mom. Motorcycles de-grew by 17% yoy, while scooters fell by 7.6% yoy. However, the low cost mopeds performed well by growing 16% yoy. 3 Wheelers have continued their underperformance as they declined 33% yoy and 26.5% mom. In FY 12, TVS sales grew by just 7.9%. With rising competition in the scooter segment from Honda, M&M and Suzuki, slowdown in motorcycle segment and structural weakness in 3 Wheeler segment , we continue to believe that TVS will be a laggard in the 2W segment.

Blockbuster start to 2012

Blockbuster Start to 2012

The start of 2012 has been a thrilling experience for anyone who is into stock markets. It’s been a stupendous rise for some of the major stocks and indices are clocking gains as I write this piece of article.

What needs to be seen now is whether the rally has gathered enough momentum to sustain the same, in short whether it is a steroid providing a short term boost or a proper medication. It’s not how effective a medicine works at the first instance, it is how far can the medicine last and what would be the repercussions of the same is something which needs to be watched with bated breath.

FII’s have made a strong comeback into our markets. Till date since the onset of 2012, they have pumped in 25000 cr(approx), and let alone in the month of Feb they have pumped in 14000 cr (according the the actual numbers from SEBI). We have already seen, some of the stocks making a brilliant comeback and rallying more than 50% of their price since the last 5-7 weeks. The European problems and its issues are being sidelined by the markets, and we can now say that they are forward looking, especially with the painful Q3FY12 period for most of the local companies getting a relief.

I believe that the undertone of this strong rally has purely been the turnaround of the interest rate cycle. RBI cutting the key interest rates and signalling that inflation cooling further will give them a leeway to relax the steep rise in interest rates and Infact go for a cut in the same. The banking sector which comprises a major proportion of our stock market capitalisation will heave a sigh of relief with this reversal of interest rate cycle. This will in turn have a trickling down effect to rate sensitive sectors such as Real Estate, Auto stocks, Capital Goods etc.

Technically one of the best part of this “relief rally” has been that we have comfortably crossed the 200 DMA, and have managed to sustain that since the start of Feb 2012. This is an extremely positive sign for the outlook going forward. Some stocks have touched their 52 weeks high and some of them have rallied to lifetime highs in this rally. It is a good sign, but what is now important is when the markets would go into the consolidation phase the kind of correction in the stocks which we will witness then, would determine the sustenance of this rally going forward.

It is true that stocks would always provide a higher percentage returns vis a vis the index, but it is the index which will show the actual “direction of the trend”.

Markets have proved it yet again that “ To break extreme pessimism, you need extreme optimism.”

Good come back!

Good come back!

 Better than expected January performance surprised us as December was quite a low for many of the companies. Maruti was more than a surprise as quickly getting back to recovery after abysmal October sales was not expected. However, sustainability of the same is a question as government’s stand on diesel vehicles will play a big role in future sales of Maruti. Also, competition, and higher fuel prices are still downside risks for the company. M&M put up a robust show on the auto side and is expected to excel further as XUV500 sales gains momentum. On FES side, the performance was down yoy, but showed a good pull back sequentially. Tata Motors stunned one and all on the street as all of its segments showed a strong performance. CV sales were buoyant on strong LCV sales, while PV sales were up on strong Indica and Indigo sales. TVS was a big disappointment as its market share is getting cut on strong competition all around. Given the rally witnessed in stock prices, currently we believe that the valuations of most of the auto companies seem stretched. Hence, we are neutral to underperformer on most of the auto stocks now. We however maintain Buy on M&M and Ashok Leyland.

 

Hero Motocorp – (TP – Rs1,996, Neutral) – Still holding on…

HMCL sold 5.2 lakh unts in January, which was a 11.55 yoy growth and a fall of 3.7% mom. This was slightly lower than our expectation of 5.25 lakh units. The YTD growth of the company now stands at 17.4%, the strongest among the two wheeler companies, while we are expecting 15% growth in FY 12. HMCL has been the only two wheeler company which is still showing traction in growth vis-à-vis other players who have shown moderation. A sudden fall in mom volume growth cannot be ruled out if HMCL is pushing volumes to the dealers.

 

Mahindra and Mahindra – (TP- Rs772, BUY) – Auto segment posts strong performance, FES slows down further

M&M sold 44,718 units, a 22% growth yoy while it was a growth of 5% mom. This performance was better than our expectations. Passenger UV sales in the month grew by 15% yoy to 18,446 units, which was 2% growth mom. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 35% growth yoy as the LCV segment continued to grow at a strong pace indicating expansion in the total sub 1 tonne LCV market. Verito sales were strong in the month at 1,529 units up 37% yoy v/s ~1,300 units in December. Export sales moved up by 95% yoy  to 3,348 units with traction seen in major export markets like South Africa and US. Farm Equipment Segment (FES) which had posted a very robust growth of 71% in October almost halved in November, and moved down even further to 15,315 in December has posted a negative growth of 6% yoy in January. This was still better than what we had expected and is above the December number of ~15,500. Opening up of bookings for XUV 500 again in 19 cities of India in January will lead to a better volume performance from this model in FY 13. Since the booking have opened, XUV 500 has registered bookings of more than 5,900 units. Pan India launch will happen once the capacities move up to >5,000p.m. levels in May from current levels of 2,000 p.m.

 

Maruti Suzuki – (TP – Rs 1015, Underperformer)- Strong recovery

Maruti Suzuki (MSIL)‘s sales in January came at 115,433 units as compared to 92,161 units, 25% growth on mom basis, while on yoy basis it  was up by 5.2%. In a scenario where petrol prices are moving up, the bread and butter segment, the mini segment of Maruti comprising Alto, Wagon R and A Star de-grew by 2.4% yoy. The compact segment comprising Swift, Ritz and Estilo showed an improvement as demand for diesel car is moving northwards on the backdrop of gap between petrol and diesel prices increasing.  Vans segment also declined by 11% yoy, but showed a good growth of ~40% mom. Exports were the star performer again as they grew by 54.3% yoy as they sold 14,386 units a jump over ~9300 units yoy, while mom, it was lower by 300 units only. However, SX4 and Dzire segments posted yoy de-growth, at 12% and 10% respectively. Any rate cut by the central bank of India may have a positive impact on the volumes, while petrol price hike will impact sales adversely and on the other hand any call on the diesel cars in upcoming budget may hamper diesel car sales. Launch of Ertiga needs to be watched out as low ground clearance may pose a setback to the company while pricing between Rs7-8 lakh will push sales.

 

Tata Motors – (TP- Rs253, Neutral)- Stellar performance!

January sales for the company were at 87,465 units, 16% up yoy and 6% up mom. CV sales grew by a healthy 14% yoy, out of which LCV sales were up by 15% yoy signifying LCV segment’s defiance of the macro uncertainties. New launches like the variant of Ace Zip led to the growth in LCV. MHCV sales also grew by 11%, which was a strong growth again. PV segment sales have started to pick up since last couple of months as they grew by 14% yoy on some strength coming from Indica range which was up 9% yoy on new launch of Indica Vista launched a quarter back. Utility segment sales went up by 38% yoy. Indigo range sales were smartly up by 10% yoy. Nano sales grew at 7,723 units  15% up yoy and showing a quick recovery over the past few months and lows hit at 500 units in November 2010. Continued strength in CV business aided by LCVs and recovery in PV sales have led to a solid growth in volumes of the company.

 

TVS Motor – (TP – Rs55, Underperformer)- Losing out to competition

TVS sold just 1.73 lakh units in January missing our estimate of 1.82 lakh by a good margin. This was a growth of just 3% mom and 5% yoy. Scooters segment grew by just 2% yoy to 41,469 units, while motorcycle sales in January reported a de-growth of 5%. Three wheelers are posting a consistently disappointing performance as the company sold just 2,402 units v/s 3,427 units a year ago. Mopeds segment, which is the major volume earner for TVS declined by 13.8% yoy to 45,937 units v/s its monthly run rate of~64,000 units. With rising competition in the scooter segment, slowdown in motorcycle segment and structural weakness in 3wheeler segment , we now believe TVS will be a laggard in the 2W segment.