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Archive for September 6th, 2011

Not a bad month for autos

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Not a bad month for autos though car sales disappoint

August, a month where rainfall is at its peak after July, is traditionally a month of subdued auto demand. Such a mood was seen in the cars segment, while the commercial vehicles and two wheelers bucked the trend. August was a month better than July for the auto sector when interest rates were hiked, while fuel prices showed their complete impact. As expected the cars segment of Maruti and Tata Motors underperformed on competition and macro concerns, while two wheeler companies like Bajaj Auto and TVS reported their record sales. The trend in the LCV segment is also still going strong as indicated by M&M and Tata Motors’s LCV sales. On the MHCV side the growth seemed to be not bad at all, with Tata Motors posting a double digit growth of 12% yoy. To sum up, we continue our negative stance on Maruti Suzuki which is the biggest victim of the macro headwinds, followed by Ashok Leyland with an undiversified business will feel the heat. On the two wheeler side, Hero Honda’s value is factored in its stock price, while we see margin pressures to add to the company’s woes. TVS Motor, M&M and Tata Motors remain our top picks within the sector, while the sudden sharp run up in Bajaj Auto’s share price has led us to downgrade it to Neutral from BUY as our target price of Rs 1647 got achieved today.

Ashok Leyland – (TP – Rs21.5, SELL)- Disappoints again

Ashok Leyland (AL)’s sales in the month came in at 7218 units, down 4% yoy and 8% mom. As mentioned above, the presence of the company in just MHCV business is hurting it as macro cues tend to worsen. The recently launched LCV ‘Dost’ will take some time to show its results in the volumes, while at the same time it will face competition from the established Tata Ace and M&M Maxximo. In August, AL’s domestic business sales fell by 8% yoy, while exports posted a strong growth of 35% yoy, which was not sufficient to offset the de-growth in the domestic business.

Bajaj Auto – (TP – Rs1,647, Neutral) – Racing ahead on twin horses

Bajaj Auto has posted a record performance in August by selling 3.83 lakh units, a growth of 16% yoy and 5% mom. On the motorcycle side, its twin brands Pulsar and Discover reported strong growth and contributed about 65% of total motorcycle sales. The company has recorded highest ever motor cycle sales thus indicating that the 2Wheeler sector is insulated from any macro headwinds. Three wheeler sales came in at 44,685 units, a growth of 11% yoy, flattish qoq. Opening up of permits in 4-5 states will help the company to sell a significant amount of 3Wheelers in the coming months. On the export side, Bajaj Auto sold 1.38 lakh units, a growth of 40% yoy and contributed 36% of sales v/s 29% yoy, which indicates a better profitability in the month.

Hero Motocorp – (TP – Rs1,560, SELL) – Volumes strong, valuations overstretched

After unveiling its new brand, logo and a heavy advertising campaign, Hero is poised to report strong sales without support of old time partners Honda. Sales for the month reflected its strong marketing campaign as they sold 5.03 lakh units in August, 19% up yoy in line with the strong performance of the 2W segment. The company unveiled two of its new products, a 110cc scooter Maestro and  a 150 cc motorcycle Impulse to be launched soon. They also plan to enter export markets big time for which they have identified key markets in Africa, LatAm and South East Asia. All said and done, we remain negative on Hero Motocorp as we believe that branding and R&D expenses along with competition will hit the bottomline significantly. At this price, the stock is trading at 17.5x times FY 13 multiple which we believe is overstretched.

Mahindra and Mahindra – (TP- Rs 831, BUY) – Noncore auto business supports growth

In August M&M sold 37,684 units, a 30% growth yoy and a slight decline mom. UV sales in the month were a slight disappointment as they grew by just 7% yoy, however with festive season round the corner, it is expected to bounce back. 4W pick-up segment which includes Gio and Maxximo posted a robust 67% growth yoy as the LCV segment continued to grow at a strong pace. Verito has posed yet another stellar month with a growth of 113% yoy with sales recorded at 1,710 units , 5% mom above 1,630 units sold in July. Export sales also moved up by 57% with traction seen in major export markets. Farm Equipment Segment (FES) posted a very robust growth of 21% yoy to 15.059 units, while sequentially they were down by ~10% on higher purchases in July, which is the peak monsoon month.

Maruti Suzuki – (TP – Rs 1,195, Underperformer)- Troubled by both macro and micro issues

Maruti Suzuki (MSIL) ‘s sales in August came at 91,000 odd units, a decline of 12% yoy, while on mom basis it was up by 21%.  In July the sales were down due to shifting of production of Swift Dzire from Manesar plant to Gurgaon plant and discontinuation of dispatch of old Swift in July before the upcoming launch of new Swift in August. Both these activities hit the company by  collective sales of ~17,000 units, which got rectified in the month of August with the launch of new Swift and complete transfer of Swift Dzire production to Gurgaon, but it still fell short of the 1lakh mark recorded last year. Going forward, the recent hike in interest rate by RBI will lead to it getting passed to customers sooner or later, which will further impact demand. New launches from competitors and fuel price hikes will add fuel to this. Hence , we believe that Maruti will continue to underperform its peers and the auto industry over the next one year. Repeated strikes by workers at Manesar plant are jolting the production targets of the company thus hampering the topline growth. However, the recent commencement of second line of production at Manesar plant will somewhat help Maruti to regain the lost market share.

Tata Motors – (Under review)- Underperformance in PV business overshadows outperformance in CV business

August sales for the company were at 64,078 units, 3% down yoy remaining flat mom. CV sales grew by 21% yoy, out of which LCV sales were up by 27% yoy and MHCV sales were 12% higher yoy. This reflects strong CV sales despite macro headwinds. PV segment sales were down by 34% yoy to 17.898 units while utility segment sales went up by 15% yoy.  Indica range continued to see a de-growth of 4% yoy as competition in the hatch back segment continued its intensification with the market leaders Maruti and Hyundai also feeling the heat. However, it was a recovery compared to Indica sales last month which fell by 32% yoy.  Indigo range sales were also low by 24% yoy. Nano also underperformed, continuing its downward trajectory selling only 1,202 units, down 85% yoy  as a fortnight long production break was taken by Tata Motors at Sanand plant for maintenance purpose as well as realignment of production for inventory rationalization.

TVS Motor – (TP- Rs 66, BUY)- Three wheeler growth was the highlight, 2 wheelers post a stable growth

TVS sold 1.94 lakh units in August, a strong growth of 14% yoy, while on a mom basis it inched 3% up. Scooter sales grew by 28% on strong Wego sales, while motor cycles grew by 17% yoy despite Jive being a failure. Total domestic two wheelers grew by 11%, while exports sailed by 48%. This growth indicates that the macro concerns have still not hit the two wheeler sector and TVS’s brands are showing a good demand. 3W sold 4,714 units up 20% yoy and 43% mom, which indicates a solid and quick pick up in TVS’ three wheeler, the ‘King’. Opening up of new 3W permits and launch of 2 new 2W will lead to a good traction in TVS sales going forward. Management has guided for a 15% volume growth this year, which we believe will not be difficult to achieve if sales growth continue at this pace.








Written by Fundamental Side

September 6, 2011 at 2:06 pm