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LCVs, 2W holding strong, Cars in reverse gear!

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LCVs, 2W holding strong, Cars in reverse gear!

Month of July being another traditionally sluggish month for auto sales has reported weak sales as per expectations, especially in the cars segment. Maruti Suzuki faced the brunt this month again as shifting of production and discontinuation of old model for a new model launch taxed the company heavily. Also another round of interest rate hike from RBI is set to spoil the mood next month. Tata Motors’s car segment including Nano also put up a dismal show as it has already started to weaken in an intense competitive environment. On the 2W side, sales are still holding firmly as they seem to be insulated from macro risks as indicated by TVS Motor, which reported robust sales in July. The trend in the LCV segment is also still going strong as indicated by M&M and Tata Motors’s LCV sales. To sum up, we continue our negative stance on Maruti Suzuki which is the biggest victim of the macro headwinds, followed by Ashok Leyland which we believe being a pure play MHCV player 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. We believe Bajaj Auto, TVS Motor, M&M and Tata Motors are on a strong wicket considering their specific strengths outpacing their weaknesses.

Mahindra and Mahindra – (TP- Rs 804, BUY) – Clear outperformer
Yet another month of strong performance by M&M marks this company as a clear cut winner in the auto space with no hiccups in a difficult environment. M&M reported a strong 41% yoy growth in its auto segment to 39,633 units, with passenger UV sales growing 30%yoy and the 4W pick-up segment which includes Gio and Maxximo posting a robust 91% growth yoy. Verito has posed yet another stellar month with a growth of 117% yoy with sales recorded at 1,630 units , 8% mom above 1,510 units sold in June and 1,219 sold in May. Export sales also moved up by 78% with traction seen in major export markets. Farm Equipment Segment (FES) posted a very robust growth of 15% yoy to 16,718 units, while sequentially they were down by ~30% on the pre monsoon purchases in June, which is one of the best month for tractor sales.

Maruti Suzuki – (TP – Rs 1,195, Underperformer)- Another disappointing month
Maruti Suzuki (MSIL) ‘s sales slumped in July to 75,000 odd units, a decline both on yoy as well as mom basis. This was mainly on 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. Had it not been the case, the sales would have been up on mom basis, while still down on yoy basis by 8%. 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.

Tata Motors – (Under review)- CV sails, PV fails!
June sales for the company were at 63,761 units, 6% down yoy and 5% mom. CV sales grew by 14% yoy, out of which LCV sales were up by 22% yoy and MHCV sales were 4% higher yoy. This reflects strong CV sales despite macro headwinds especially in the LCV space. PV segment sales were down by 39% yoy to 30,166 units while utility segment sales fell by 2% yoy. Indica range continued to see a de-growth of 32% yoy as competition in the hatch back segment continued its intensification with the market leaders Maruti and Hyundai also feeling the heat. Indigo range sales were also low by 30% yoy. Nano also underperformed, continuing its downward trajectory selling only 3,260 v/s 5,451 units in June, 6,500 in May and 10,000 odd units in April.

TVS Motor – (TP- Rs 66, BUY)- Marching ahead
TVS sold 1.89 lakh units in July, a strong growth of 14% yoy, while on a mom basis it inched 4% up. Scooter sales grew by 22% on strong Wego sales, while motor cycles grew by 17% despite Jive being a failure. Total domestic two wheelers grew by 12%, while exports sailed by 34%. 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 3,290 units up 6% yoy, which is seeing a trend reversal as export sales have more than doubled domestic sales in the last few months. 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.

Written by Fundamental Side

August 1, 2011 at 5:40 pm