Two wheelers hit a roadblock, 4 wheelers better than expectations

Two wheelers hit a roadblock, 4 wheelers better than expectations

 In a lean month of December, 4 wheeler companies posted a good performance despite severe pressures in terms of consumer sentiments, higher cost of ownership, high fuel prices, maintenance shutdowns at few companies and expected slowdown in demand. Maruti continued to sell more than 90,000 units, while M&M sold >42,000 units of auto sales including SUVs, LCVs and 3 wheelers, which was a good growth. Tata Motors also improved its PV sales performance with Nano putting one of its best performances in the recent past. On the CV side, LCVs continued their robust performance while MHCV grew within their limits. 2 wheeler sales spoiled the otherwise good show from the auto pack, as Bajaj Auto posted a dismal show and TVS Motor put up a suppressed growth. Going forward, with seasonally strong Q4 coming up, we see some recovery in auto sales. Any cut in interest rates or any moves by the government in budget like application of higher excise duty on diesel cars will be the triggers to the sector. Expected price hikes from most of the players may have a contra-intuitive impact on the volume performance of the sector. We continue our cautious view on the sector.

 

Bajaj Auto – (Under review) – Unexpected weakness witnessed

Bajaj posted a very disappointing sales performance in December as sales plummeted by 18% mom to 3,05,000 units, while growing at just 10% yoy.  Motorcycle sales were up 8% yoy and down 21% mom. A maintenance shutdown for 4-5 days, increasing inventories at the dealers’ end, weakening demand for premium segment two wheelers and lukewarm response to the recent launch of Boxer bike led to a tepid performance by Bajaj Auto. Exports de-grew by 7% mom while growing by 25% yoy. Going forward, as retail inventory gets cleaned up and seasonally good Q4 comes up, we are expecting Bajaj Auto to get back to the level of >350,000 units.

 

Hero Motocorp – (TP – Rs1,928, Neutral) – Solid resilience!

HMCL has surprisingly held a 5.4 lakh units  of sales  performance, a growth of 7.8% yoy and flat growth mom.  The company is a proxy to the rural growth in India and continues to post stellar numbers on growing rural economy even when its competitors are faltering. We expect them to put up a volume growth of 15% in FY 12, however we are concerned about competition coming up from Honda in FY 13 as they are rapidly ramping up the capacities against Hero who are at nascent stage of setting up new capacities which may become a constraint to their  growth. Slightly stretched valuations and margin concerns are other worries.

 

Mahindra and Mahindra – (TP- Rs889, BUY) – Auto segment posts decent performance, FES slows down

M&M sold 42,761 units, a 26% growth yoy while it was a growth of 5% mom. UV sales in the month grew by 23% yoy to 18,078 units, which was 8% 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 1,263 units up 41% yoy v/s 896 units. Export sales moved up by 89% yoy  to 2,870 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 to 17,527 as inventory correction happened in November and moved down even further to 15,315 in December and we expect the current monthly run rate of tractors to be maintained, thus punching a growth of close to 18% in FY 12. Opening up of bookings for XUV 500 again in 5 cities of Mumbai, Pune, Bangalore, Chennai and Delhi in January will lead to a better volume performance from this model in FY 13. 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 887, Underperformer)- Stable sales performance

Maruti Suzuki (MSIL)‘s sales in December came at 92,161 units, flattish mom, while on yoy basis it was down by 7% as consumer sentiments in PV industry deteriorated off late. The flattish growth indicates signs of stability at Maruti’s end even when there was a maintenance shutdown at their plants. Had the  shutdown not been there, sales would have come close to 100,00 level. 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 16% yoy. The compact segment comprising Swift, Ritz and Estilo remained flat yoy.  Vans segment also declined by 42% yoy. Exports were the star performer as they grew by 50.5% yoy s they sold 14,686 units a jump over 11,000 run rate observed over the past few months. However, SX4 and Dzire segments posted growth, at 11% and 6% 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. New launches from competitors add fuel to this. The upcoming auto expo in January will see two MPV launches from Maruti (one being named as Ertiga).

 

Tata Motors – (TP- Rs195, Neutral)- Performance par excellence!

December sales for the company were at 82,278 units, 22% up yoy and 7% up mom. CV sales grew by a healthy 14% yoy, out of which LCV sales were up by 20% 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 5%. PV segment sales have started to pick up since last couple of months as they grew by 47% yoy on some strength coming from Indica range which was up 57% yoy on new launch of Indica Vista launched a quarter back. Utility segment sales went up by 35% yoy. Indigo range sales were smartly up by 32% yoy. Nano sales grew at 7,466 units  29% up yoy and showing a quick recovery over the past few months and lows hit at 500 units in November 2010.

 

TVS Motor – (TP – Rs60, BUY)- Still below the monthly mark of 2lakh…

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 and the same continued in December as well. Total sales showed a flattish to a slight negative growth on yoy basis at 170,428 units, while sequentially they de-grew by 3%. Scooter sales grew by 7%, while motor cycle sales declined by 8%. Bloating up of inventory pipeline on weak retail demand led to such an underperformance. TVS’s 3 wheeler sales are on a lower trajectory as they sold just 2,523 units from 3,431 units sold in last December. Exports grew by 6% yoy. We believe that 15% volume guidance by management looks too optimistic. We expect 9% growth from TVS this year. In view of attractive valuations, upcoming new launches and economies of scale, we remain positive on TVS even after factoring 9% volume growth this year and 11% next year.

Mahindra Finance- Rural And Semi Urban Market Growing

We recently met the management of Mahindra Finance. These are some of the key highlights.

Rural and semi urban markets are growing at 20% plus rates versus urban and metros where growth rates have dropped considerably.

Multi product multi application and multi customer is the way forward. These benefits lower concentration to particular states which reduces state specific risks. This is one of the reasons the company is reasonably sure of not breaching the gross npa levels of FY08 and FY09.

The process of securitization which was dead post the draft guidelines have once again begun and the company has securitized Rs300 crs in November 2011. However the difference is in the process of accounting for securitization revenue which has moved from the upfront accounting to amortization

Public sector banks which were aggressive in the market have lowered their enthusiasm as they are battling issues of credit loss and customer defaults. Hence competition has intensity has come down

The company is not strapped for asset growth. Even on its internal benchmark of financing 40% M&M vehicles it is at the 30% mark leaving ample room for growth within the parent portfolio. Outside M&M portfolio, it has tied up with Hyundai, Tata Motors, Ashok Leyland.  It has built relationships with dealers and OEMs and hence a certain process of growth is an automatic process.

This year the focus will be on liabilities (securitization guidelines, acquiring excess liquidity from banks and diversifying sources) and on policies (the regulator has tightened the screws on consumer lending, Usha Tharot Committee report)

The company will continue to access the variability of the market through – collection efficiencies and the regular nomenclature – underline cash flows of the product – dealer pressure on financing activities. Based on these activities the company takes a call on LTVs and product strategy and growth level targets.

 

Weakening Rupee & Dividend Yield Stocks

Weakening Rupee & Dividend Yield Stocks

With the rupee weakening by more than 19% this year we find ourselves caught up in an inflationary environment despite a series of rate hikes by the RBI. India Inc is now caught in a scenario of slack demand, rising input costs ,wage costs and interest cost coupled with MTM losses on its FX loans. In such a scenario it is no surprise that Infosys continues to remain a safe heaven for investors as it will continue to report earnings growth and has proven ability of displaying the best organic revenue growth among leading IT companies over the past 10 years with a return on capital of more than 65%.  

As the market continues to hide in IT stocks like Infosys, TCS & HCL Technologies in times of rupee weakening, the thirst for good dividend yield stocks beyond the NIFTY FIFTY is still prevailent and we find that the steep rupee depreciation has now caught up with some of the so called “Dividend Yield” stories which are part of the BSE 500. One such example is the Pune based pipe producer – Finolex Industries which apparently has a dividend yield of 7% at the current price- but one look at its debt equity and import intensity is enough to get the sense that earnings would degrow thereby casting a shadow on such dividend yield themes. It is for this reason that we like free cash generating business and prefer to buy such business for dividend yield despite low growth and when you do get growth out of such business then you reap it big like in the case of the cigarette company – VST Industries.

 

OIL India – going strong

OIL India – going strong

Q2FY12 crude oil & natural gas production were record highs for the company.

Crude oil production rate has been increasing continuously and OIL is presently producing crude at a rate of 3.96 MMTPA (FY12 MoU target: 3.76 MMT). This is noteworthy as most of its production is coming from aging fields in the North East. There has been a steady growth in oil production since the last 3 years through induction of new technologies and accelerated exploration and drilling campaign. Q2 FY12 production rate is even higher than the FY13 MoU target of 3.91 MMT.

Gas production is set to increase at CAGR of 7.1% from FY11-13 driven by steady production from its NE & Rajasthan fields and monetization of contingent reserves. Gas supply to Numaligarh Refinery Ltd (NRL) would also be ramped up to 1 mmscmd. Revision in APM & non-APM gas prices after FY14 is expected to provide another jump to gas sales going forward.

We assume 39% of the gross subsidy burden to be borne by the upstream sector in perpetuity. Taking into account the fact that the upstream sector has shared 33% of the subsidy burden in H1 FY12, we expect the upstream sector to share 51% of the total under recoveries for H2 FY12. However, we expect OIL to post FY12 net realization of $ 67/bbl.

Oil India will also be holding a Board Meeting on Dec 20, 2011 to consider the declaration of Interim Dividend for FY12. As the company is holding a cash balance of Rs 136 bn as of Sept 2011 which translates into a whopping Rs 565/share, we expect a big dividend which will act as a trigger for the stock price.

We maintain our BUY rating with a target price of Rs 1,526.

Mixed bag in Motown

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.

 

MRPL – play the refining cycle

MRPL – play the refining cycle

Mangalore Refinery & Petrochemicals is expanding its refinery to 15 MMT by Jan/Feb 2012. The expansion will witness the refinery complexity rising from 5.5 to 9, which will be helpful for maximizing GRM. The expanded refinery will also consist of a 2.2 MMTPA Polypropylene (PP) FCCU which will mark the entry of the company into the petrochemical space. The PP unit is expected to achieve mechanical completion by Apr 2012 and commissioning by Jun 2012. Excellent product slate of the expanded refinery, due to reduction in fuel oil and introduction of PP, is expected to result in GRM jumping by ~$ 3.5/bbl during FY12-13. Realization for PP is currently ~$ 1500/ton, which is almost double that of other refined products. We estimate GRM of $ 5.1/bbl and $ 8.7/bbl in FY12 & FY13 respectively.

Upon completion of the expansion project, MRPL would be eligible for a 7 yr tax holiday under section 80IB of Income Tax Act. The company is also in talks with Karnataka State Govt. for Rs 1.25 bn Sales Tax deferment benefit, Rs 0.9 bn of CST benefit, Rs 0.8 bn of saving of Entry Tax on crude and one-time benefit of Rs 3 bn on exemption of Entry Tax on project benefits. GRM will be significantly higher than our estimates if the company is granted these tax incentives.

We value MRPL using a target EV/EBITDA multiple of 6x on FY13E EBITDA and reiterate BUY with a target price of Rs 81, which translates to upside of above 30%.

Stuck in short range

STUCK IN SHORT RANGE

There was some upward move seen last week but, such optimism was tempered when it came under renewed selling pressure on Monday. Globally markets were down owing to continued European concerns. While day-to-day fluctuations are reducing investor risk appetite it would be difficult to see the trend change soon. We have been advocating bearish view after the close of Friday and advised traders can short with stop loss of 5300. A sharp decline was seen in momentum stocks like Lovable, Dish TV , Delta corp and VIP inds which is indicating that bulls are also acknowledging the weakness. Markets are currently stuck in a small range and for Nifty future 5100 and 5300 can be considered as short range and between these range bias remains negative. If Nifty manages to break out from this range there could be a very sharp move on either side for minimum 3% to 4%. Based on short term charts averages 5100 will act as strong support and if indices sustain below 17000 and 5100 there could be sharp decline in subsequent days. A renewed buying interest can be expected only once these global concerns trim down otherwise market are likely to become lackluster in coming weeks.

Confidence likely to come back into our markets

CONFIDENCE LIKELY TO COME BACK INTO OUR MARKETS

With major boost coming from Italy accepting the austerity measures, the global markets romped their way back to register strong gains on Friday. Bulls were in clear command, and that would likely be the trend for the Asian markets as well. Last week, even though a truncated one proved to be a blessing in disguise for our markets, as on Thursday 10th Nov, the Asian markets saw a sharp cut, with Hang seng notably down more than 1000 points. However, our markets were closed on Thursday, and on the next trading day we managed to relatively outperform the Asian peers. IIP numbers were also announced on Friday, and it was not a strong set of numbers, however, the new question which lingers in everyone’s mind now is “Whether the worst is taken care of in terms of IIP?.” Technically markets are still trading above their critical support levels of 5150 on closing basis, and if all bodes well for the market, this retracement from the 200 DMA ( 5400 levels) on Nifty, might well be over and done with, and we could now start inching back towards that level of 5400. Look closely and there is a definite confidence coming back into the market. The probability of upside moves has increased, and now breaking 4700 seems to be difficult. It would need an extremely strong negative event to break this support level for the markets now. Now the critical question remains, how should we trade our markets now? The dramatic events in Euorpe appear to be settiling down – atleast in the short term. This should be a boost to the global markets. We could also see the Asian markets showing short term rally. Ideally for all long positions the stop loss should now be placed at 5150 levels. And the next few days will be very critical for the market, especially the first test to 5280. As you can see from the short term channel on Nifty, the resistance is placed at 5280. Above that we can convincingly say that the market would likely head to 5400 levels again.

Savings Bank Interest finally deregulated

Savings Bank Interest finally deregulated

Saving bank account interest rate deregulation has finally arrived. The first banks to lead the way with higher rates were the ones with nothing much to lose namely Yes Bank, IndusInd Bank and Kotak Bank. Low saving deposit balance meant that these banks have a greater scope as the gap between SA and term deposits remains a 400-450 bps gap.  The mammoths of the banking system have yet to budge. I understand the insistence that saving accounts are transaction related products. However, with standardization across transaction banking services and the small banks named above no less technologically savvy my guess is the argument won’t last too long.  So should we expect a rush at branches for account opening applications? Unfortunately the answer is NO. The reason being, large banks continue to enjoy huge network, yes it does matter even in the days of internet banking and cross linkages of ATMs, and not to mention transaction related tie ups and linkages. Savings account products are convenience related and with real interest rates negative on most retail deposits, it is hard to imagine savings accounts as the next investment vehicle. So will the large banks increase saving account rates? I believe that eventually they will, things have a way of balancing out, it’s just my hunch but they are holding off as long as they can.

There also seems a split in the nature of customers and between banks. One is the urban and rural divide. Rural customers sub Rs1 lakh deposits are a lot more loyal to banks. Can’t blame them really, a trip outside of the metros and Tier I cities will explain the presence PSU banks have built. PSU banks have thrived on this fact and dominate this category of rural and semi urban customers. The issue now comes to urban centers and metros. Here there is a mix of the sub Rs1 lac and higher depositor and PSU and Private Banks. This is where large banks cannot write off the rate increase by smaller technologically advanced new generation banks.  

A lot has been said on the subject over the past 2 weeks and a number of citations have been made of developed countries offering deregulated rates. However, there aren’t any free lunches. Deregulation has been introduced at a time when money supply is under pressure and banks may be pulling all strings to maintain a low cost deposit base. Hence we are experiencing a rising saving rate cycle. However, just like the pattern in developed countries this could reverse itself when money supply is easy. Also, banks could impose a levy on transaction services offered to saving account holders or pass higher cost of funds through higher base rate. From what we have seen over the past 2-3 quarters bankers are in no mood to absorb higher rates and if their second quarter margins are intact it only means that they have passed on the increase in cost of funds.

 

 

Cairn India does it again

Cairn India does it again

Cairn Lanka (Pvt) Limited, a wholly owned subsidiary of Cairn India, has made a Gas Discovery in the block SL 2007-01-001, Mannar Basin, Sri Lanka. Cairn Lanka (Pvt) Limited is the Operator and has a 100% participating interest in the block. Further drilling will be required to establish commerciality. This well is the first to be drilled in Sri Lanka in 30 years and the first successful discovery in the country. Cairn has committed $ 100 mn for its 3-well drilling campaign in this block.

 Consequent to Cairn India’s acceptance of royalty as a cost recoverable item and cess liability on its share of production, the Board of ONGC has issued its NOC to the Cairn-Vedanta deal. We believe that this is a major step forward for the consummation of the deal as well as for obtaining the necessary approvals for production ramp up from Mangala and production start from Bhagyam. We expect news flow regarding production ramp up to be positive near term triggers for the stock going forward.

 We expect production levels to be ramped up to 210,000 bpd by Q4CY12. We expect EPS of Rs 37.5 and Rs 46.5 in FY12 & FY13 respectively. We expect free cash flows of Rs 33 bn & Rs 70 bn during FY12 & FY13 respectively.

 Following the steep correction in the stock price, we upgrade our rating to BUY with a target price of Rs 334, translating to an upside of 23.4%.