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Mixed bag in Motown

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Mixed bag in Motown


With festive season falling completely in the month of October, November was seasonally a lean month for a few companies sequentially. However, on a yoy basis, most of the companies have posted strong growths. TVS numbers were disappointing in line, while Maruti, Hero and Tata Motors exceeded our expectations. M&M’s UV sales were robust in line, while FES segment sales were below our expectations.  Maruti saw a sequential rise on the back of labor issues getting settled off in November, while Hero Motocorp surprised the street with resilient demand and a sequential growth. Going forward, some moderation in growth is expected to set off in the auto sector with macro concerns like inflation, fuel costs and interest rates remain high. Within the 2 wheeler sector, there will be lower yoy growth rates due to high base effect and with competition setting to increase with Honda’s aggressive strategy impacting profitability. Bajaj Auto’s domestic growth will remain weak, but exports are expected to boost the overall sales, while Hero will observe subdued growth on higher base and capacity constraints over the next one year. M&M will continue posting strong UV sales while FES segment will observe moderation from October sales numbers, as seen in November. Any hike in excise duty on diesel vehicles may impact UV sales. Tata Motors will see positive movement in their CV sales as CV cycle is expected to turn strong if interest rates no more increase from here.


Hero Motocorp – (TP – Rs1,928, Underperformer) – Unexpected sequential surge!

HMCL has surprisingly posted a sequential 5% growth at 5.36 lakh units above our expectations. On a yoy basis, the company posted a 27% yoy growth. The company is a proxy to the rural growth in India and continues to post stellar numbers on growing rural economy. However, on the back of stretched valuations, we believe that the stock is factoring all the expected positives like the upcoming production plant, foreign venture and improvement in margins on softening RM costs. Market news suggest that slowing down on the macro front may force the company to put their expansion plans on the backburner, which may lead to capacity constraints on them.


Mahindra and Mahindra – (TP- Rs889, BUY) – Sequential decline in FES segment, UVs remain robust

M&M sold 40,722 units, a 53% growth yoy while it was slightly down on mom basis. UV sales in the month grew by 46% yoy to 16,686 units, which was flattish mom. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 74% 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 soft in the month at 1,127 units , down 38% mom v/s 1,818 units. Export sales moved up by 71% yoy with traction seen in major export markets. Farm Equipment Segment (FES) which had posted a very robust growth of 71% in October almost halved to 17,527 as inventory correction happened in this month and we expect the current monthly run rate of tractors to slightly improve hereon and grow close to 17-18% in FY12. The festive launch of new SUV XUV500 priced in the range of Rs11-14 lakhs is expected to boost the UV sales as it has already attracted bookings of 8000 units in Tier 1 cities and the company has stopped taking any more orders. Capacity ramp up of XUV500 will boost UV sales going forward and also provide margin traction.


Maruti Suzuki – (TP – Rs 930, Underperformer)- Month on month numbers improve on resolution of labor unrest, however decline in FY 12 inevitable

Maruti Suzuki (MSIL)‘s sales in November came at 91,772 units, a sharp growth of 65% mom, while on yoy basis it was down by 18% as labor unrest got resolved in November. However, macro factors are spoiling the game as PV sector is struggling to gain its lost luster. The bread and butter segment, the mini segment de-grew by 27% yoy as it is the petrol portfolio of MSIL and rising petrol prices have taken a toll on this segment. The compact segment fell by 4% yoy.  Vans segment also declined by 34.5% yoy. Exports were down by 11.4% yoy. However, SX4 and Dzire segments posted growth, albeit in a single digit. We do not see Maruti to punch more than one lakh units in the near future and hence report a negative growth in FY 12. Additionally December may see a maintenance shutdown which may hit volumes by ~8000-10,000. MSIL’s market share in the first half of the year has gone down below 40%. Going forward, the recent and any more 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.


Tata Motors – (TP- Rs195, Neutral)- Festive mood continues

November sales for the company were at 76,823 units, 41% up yoy and 11% up mom. CV sales grew by a healthy 28% yoy, out of which LCV sales were up by 41% yoy, signifying regaining of market share lost in October. New launches like the variant of Ace Zip led to the growth. MHCV sales also grew by a good 9%. This reflects strong CV sales despite macro headwinds. PV segment sales showed recovery as they grew by 81% on some strength coming from Indica Vista (up 91% yoy) on new launch of Indica Vista launched couple of months back. Utility segment sales went up by 35% yoy. Indigo range sales were slightly up by 3% yoy. Nano sales grew at 6,401 units on 3,868 units mom and 506 units yoy.


TVS Motor – (TP – Rs79, BUY)- Disappointing month

TVS Motor failed again this month to sell 2 lakh units. In October they had missed due to an unexpected maintenance shutdown. However, the fall in November came on weak motor cycle sales. This was in line with our expectations. Total sales grew by 12% yoy, while sequentially they de-grew by 5%. Scooter sales grew by 22%, while motor cycle sales remained flat. Exports grew by 53% yoy. Management still maintains their guidance of 15% volume growth with YTD growth close to 12.5%. They expect Q4 to be very strong on seasonality and couple of new launches.


Written by Fundamental Side

December 12, 2011 at 11:36 am

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