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Archive for June 7th, 2012

Nifty likely to Retest December Lows of 4530

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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 1st 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 1st 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.

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PVs and CVs reel under the May heat!

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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.