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Delay in festive season causes September sales to skid for most…

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Delay in festive season causes September sales to skid for most…

 September has been a good month for most of the auto companies (mainly the 4 wheelers) as they have started getting ready for the festive season lined up during the next two months. Dealers are stuffed with inventory to catch the festive demand. With new product launch M&M has clearly shown that a good product portfolio attracts demand defying macro hurdles, while Maruti Suzuki has posted an unexpected performance as Manesar plant is back to normal and has in fact started second shift of operation. However, macros still remain weak for Maruti and valuations look stretched. Tata Motors though posted a negative growth, its negativity was insignificant as LCV segment excelled again. On the other hand, 2 wheelers have posted a dismal show in September as inventory pile up fear has come true leading to lesser push to the dealers’ end. Also, the sales in September were down yoy as in last year, the festivals were spaced out and had already started in September.  Hero, Bajaj and TVS Motors all have posted a yoy decline, while the latter has posted a good sequential growth. We expect the next couple of months to be strong for the industry and somewhat improve the full year performance.

 Ashok Leyland – (TP- Rs 25, Neutral) – MHCVs dip, Dost excels

In September, ALL’s MHCV sales dipped by 12% yoy to 7,596 units, while the LCV Dost sold 3,027 units v/s 197 units last year when it was just launched. Including Dost, the total sales increased by 21% yoy and 13% mom to 10,623 units. This clearly signifies that amidst pain in the MHCV segment, LCVs are still holding the forte strongly for ALL. YTD, the company has posted a 33% growth to 57,327 units mainly on the back of the LCV Dost, which was launched only in October last year.

 Bajaj Auto – (TP – Rs 1825, Neutral) – Exports recovery on track

Bajaj Auto’s September sales came 14% down on yoy basis to 3,60,152 units, while there was a mom improvement of 4%. Motorcycle sales de-grew by 15% yoy despite the new Pulsar 200 NS and Discover 125ST putting up a good show ( sold 9,000 units and 35,000 units respectively) in this month. Exports are seeing a mom recovery while on yoy basis the dip is narrowed to just 6% as Bajaj Auto sold 133,222 units with Sri Lankan and Egyptian markets almost up to their normal monthly run-rate. We expect full recovery from October onwards in exports and negative growth in domestic market to correct somewhat from the upcoming couple of festive months.

 Hero MotoCorp – (Under Review) – Solid dip

HMCL’s September sales nosedived by 26% yoy and 9% mom to 4,04,787 lakh units in September ahead of festive season which we believe is an attempt to clear off inventory and newly start stuffing the dealers with fresh inventory along with new models to catch the festive demand. Also the management has cited this dip as the current sentiment in the 2W industry. We expect demand to get back in full form from October onwards.

 Mahindra and Mahindra – (TP- Rs895, Neutral) – Consistent auto business, FES sees month on month uptick

M&M sold 48,342 units in the auto segment, 10% growth yoy and a 5% mom growth. Passenger UV sales in the month grew by 22% yoy to 23,808 units, which was a 15% mom growth. The UV sales growth came on the back of ramp up in the production of XUV5oo and a pan India launch of the same in June. Also the compact SUV Quanto was launched which has received a warm response, as its order backlog is at 3,000 vehicles currently. 4W pick-up segment which includes Gio, Genio and Maxximo posted a 7% growth yoy as the LCV segment continued to grow at a strong pace indicating strong demand in the sub 1 tonne market despite a slowdown in the bigger version of the CV sector. 3Ws went back to negative growth after a strong August, as sales declined by 17% yoy. Exports grew by a 3% yoy to 3,079 units as XUV5oo was launched in South Africa in August and traction was seen from geographies like Chile, Africa, Middle East and the US. FES segment posted a better than expected performance as the company sold 20,085 units in September which was a 24% yoy decline, however it was a whopping 52% rise mom. Although YTD FES segment has fallen by 7%, we expect second half to show some improvement on expectations of a strong rabi crop.

 Maruti Suzuki – (TP – Rs 1,123, Underperformer)-Surprising stuff!!

Maruti Suzuki (Maruti)‘s sales in this month came at 93,988 units up by 74% mom and 10% yoy which was much better than our as well as market’s expectations.  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 grew by 4.9% yoy as the company is preparing for the festive season, while the company is providing >10% discounts on Alto and Wagon R. The compact hatchback segment comprising Swift, Ritz and Estillo has seen a fall of 9.7% yoy as diesel prices have seen a hike in the month while on the other hand, production at Manesar is slowly getting back to normal.  Dzire model which had been a star performer for Maruti succumbed to the lockout and declined by 60.7% yoy in August. But in September it came back to its old glory as it grew by 24.3% yoy. Vans segment grew in the positive territory after several months, as it went up by 7.5% yoy as vehicles such as Omni and Eeco showed some improvement. MPV segment, backed by the newly launched Ertiga sold 7,224 units thus maintaining its high demand base of ~7,000 units. SX4 model grew by about 46.9% yoy although the model has seen strong pressures over the past year as competition from Vento, City and Verna has increased. Exports looked weak this month again as they fell by 23% yoy. Although September sales were strong, and the next couple of months will continue to remain so, the company will still underperform on a full year basis as fuel prices are zooming up and interest rates are yet to cool off. At current price point, the stock looks overvalued to us.

 Tata Motors – (TP- Rs298, BUY)- Numbers above expectations

September sales for the company were lower by 4% yoy, while on mom basis, it went up by 5%. CV sales grew by 5% yoy, out of which LCV sales were up by 19% 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 16% yoy as macro weaknesses continued to trouble in the month. PV segment sales fell by 18% yoy while an improvement is expected in festive season. Nano segment grew by 87% yoy to 5,491 units, while it was an 15% decline on a mom basis.  Indica range fell by 23% yoy while Indigo products posted 26% decline yoy. Utility segment sales were by 15% yoy.

 TVS Motor – (TP- Rs 32, Underperformer)- Aberration!

TVS sold 1.71 lakh units in September which was better than our expectations. This was a 10% mom growth and a de-growth of 22% yoy. Motorcycles de-grew by 29% yoy to 63,832 units, while scooters de-grew by 28% yoy to 40,055 units. 3 Wheelers improved drastically as it touched record high of 5,005 units a growth of 36% yoy.  We believe this to be a 2-3 months affair on account of festive season and the stock would in our view  remain an underperformer.

 

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Weak monsoon further dampens 2W demand

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Weak monsoon further dampens 2W demand

 August is traditionally a weak month due to monsoon. This year, the overall economy is on a weak wicket and monsoon has been a dampener due to which customers have been cautious while buying a vehicle. This sentiment was clearly reflected in the August numbers as two wheeler makers like Hero are facing the brunt of heavy inventories at the dealers’ ends as the 2W industry is softening. TVS expectedly underperformed, while Bajaj’s weak domestic business got somewhat offset due to exports improvement. On the 4wheeler side, Maruti’s sales came below expectations due to the lockout at Manesar, while M&M(Auto business) and Tata Motors performed as per expectations. We like Hero Motocorp from this level, followed by Bajaj Auto as we see an improvement in their numbers in the ensuing months, especially festive months of September-November. We continue to remain negative on Maruti and TVS, while Tata Motors and Ashok Leyland remain our top pick. M&M has run up a lot, due to which we see a limited upside from current levels.

 Ashok Leyland (BUY, T.P – Rs 29)- Inline performance better than the closest peer

Ashok Leyland (ALL)’s MHCV sales dipped by 8.6% yoy to 6,597 units while Dost sales came in at 2,835 units. On the back of strong performance of Dost, total volumes went up by 30.4% yoy to 9,432 units. On mom basis, MHCV sales declined by 5.5%, while Dost sales went up by 1.1%. Total sales volumes were down by 3.6%. On a YTD basis, MHCV sales are down by just 1.5% which looks much better than its peer and CV market leader Tata Motors, whose MHCV sales have declined by 20.7% YTD. This also indicates that ALL has won market share in the CV segment and discounting is much higher than Tata Motors.

 Bajaj Auto (BUY, T.P. – Rs 1,776) – Bajaj Auto’s sales numbers in the month of August came in at 3,44,906 units, a de-growth of 9.9% yoy and flattish mom growth. Motorcycle sales de-grew by 10% yoy to 3.04 lakhs. 3W segment declined by 9.2% yoy, while improved significantly by 14.9% mom to 40,544 as Sri Lanka and Egypt have shown some recovery. Total exports declined by just 4.8%, while they improved by 4.8% mom. As exports are seen normalizing as per expectations,  the company expects the new launches in the motorcycle segment to revive their domestic business from festive season onwards.

 Hero Motocorp (BUY, T.P. – Rs 2,187) – The dent which was seen in the company’s July performance deepened as sales in August declined by 11.9% yoy and 8.3% mom to 4,43,801 units which signals lower demand in the 2W industry and inventory pile up at the dealers’ ends as demand is rural India is also shrinking in line with the weak monsoon. We expect the sales to bounce back during festive months of September-November.

 Mahindra and Mahindra – (TP- Rs828, Outperformer) Auto business support the flagging FES volumes

M&M sold 46,226 units in the auto segment, 22.7% growth yoy and a 1.8% mom decline. Passenger UV sales in the month grew by 39.4% yoy to 21,831 units, which was a 1% mom fall. The UV sales growth came on the back of ramp up in the production of XUV5oo and a pan India launch of the same in June. 4W pick-up segment which includes Gio, Genio and Maxximo posted a 13.6% growth yoy as the LCV segment continued to grow at a strong pace indicating strong demand in the sub 1 tonne market despite a slowdown in the bigger version of the CV sector. 3Ws showed some improvement as the sales remained flat yoy after several months of negative growth. Exports grew by a whopping 56.1% yoy to 3,010 units as XUV5oo was launched in South Africa and traction was seen from geographies like Chile, Africa, Middle East and the US. FES segment weakened significantly as M&M sold just 13,234 units, which was a 17.3% dip yoy and 20% mom dip as monsoon in the southern peninsula of India was deficient and in many of the districts in Maharashtra and Karnataka, some of the major markets of M&M was declared a drought.

 Maruti Suzuki – (TP – Rs 1,123, Underperformer)-Lockout + Petrol underperformance

Maruti Suzuki (Maruti)‘s sales in this month came at 54,154 units as compared to 91,442  units, down by 40.8% and 34.1% qoq as lockout jolted the production from their Manesar plant which produces the high demand diesel vehicles like Swift and Dzire. This was well below our expectations of 60,000. 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 thick and fast by 41.2% yoy, despite the company providing >10% discounts on Alto and Wagon R. The recent unfortunate turn of events at the Manesar plant which resulted into a lockout at this plant for almost the full month of August led to a 62.2% decline in the diesel segment yoy. Dzire model which has been a star performer for Maruti succumbed to the lockout and declined by 60.7% yoy. Vans segment continued to de-grow by 7.3% yoy as vehicles such as Omni and Eeco underperformed. In the MPV segment, the newly launched Ertiga sold 6,883 units thus maintaining its high demand base of ~7,000 units. SX4 model declined heavily by about 76.4% yoy as there was dearth of diesel engines and competition from VW Vento and Honda City hit its performance. Exports looked weak this month again due to the lockout as they fell by 72% yoy. We do not expect the September sales also to post a strong growth as although the Manesar plant has re-started under tight security, it is producing only 150 units per day which will get slowly ramped up.

 Tata Motors – (TP- Rs283, BUY)- Volumes as per expectations

August sales for the company were higher by 12.1% yoy, while on mom basis, it fell by 3.1%. CV sales grew by 4.9% yoy, out of which LCV sales were up by 15.6% 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 12.1% yoy as macro weaknesses continued to trouble in the month, however on mom basis it jumped by 14.8% thus showing some improvement in MHCV segment. PV segment sales grew by a handsome 32% yoy while it slipped by 15% mom. Nano segment grew by 441% yoy to 6,507 units, while it was an 18.6% growth mom, thus indicating success of the 2012 model of Nano, which is getting received very well in the market. Indica range dominated by diesel portfolio expanded by 5.3% yoy while Indigo products posted 29% decline yoy and 46.8% mom. Utility segment sales grew by 38% yoy while it declined by 9.9% mom.

 TVS Motor – (TP- Rs 36, Underperformer)- Reeling under competitive pressures and slowdown

TVS sold 1.55 lakh units in August which was very much in line with our expectations. This was a 4.1% mom and a de-growth of 20% yoy. Motorcycles de-grew by 30.9% yoy and 0.6% mom, while scooters de-grew by 26.9% yoy and 6.6% mom. 3 Wheelers improved mom performance by 18.4%, while yoy they declined by 17.1%.  In line with this, we continue to be negative on the stock as intensifying competition, high percentage of mopeds in the volumes, higher advertising expenses and weak product portfolio and bleeding subsidiary are weighing too much on the stock. Also the 2W industry is seeing some softness as well, which is weighing down on TVS a bit too much as compared to its peers.

 

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.

April – A mixed bag in Motown

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April – A mixed bag in Motown

The month of April witnessed weakness in auto sales for companies like Maruti and Tata Motors, while 2 wheelers like Hero and Bajaj reported good sets of numbers. M&M put up a good show on the auto side, on the new launch of XUV 500. Rise in fuel prices and excise duty hikes on national as well as state levels led to hampering of sentiments, while interest rate cut of 50 bps had some positive impact. CV sales were the most affected during the month as macros posted weak set of numbers (IIP). 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. Strong two wheeler sales of the two market leaders was a big surprise as the street expected weakening of rural growth to impact two wheeler sales negatively. The growth in 2wheeler sales indicates resilience on their part.

Hero Motocorp – (Under review)- Surprised one and all

Hero posted a growth of 4% mom and 7% yoy in April at 5.51 lakh units. This was above our expectations as April is generally a weak month when compared sequentially defying any slowdown or sluggishness in the domestic two wheeler industry. However, competition from Honda, new launches from Bajaj and slowdown in the rural markets remain overhang on the stock. Still among 2 wheelers, we prefer Hero over its peers due to its market leadership position, strong presence in the executive segment, widespread dealership network and array of strong products.

Bajaj Auto (TP – Rs 1,620, Neutral)- Weakness ahead

Bajaj posted 4% yoy growth in April which seems not too impressive, however it grew by 14% on mom basis which is a good start for a new year. Motorcycles grew by 6% yoy while 3 wheelers de-grew by 13% yoy. Export growth was at 7% Exports of the company jumped to 44% of sales as compared to 34% in March. Going forward, we believe that the company will continue to face increased competition from Hero and Honda in the domestic markets and new launches within the Discover and Pulsar range may cannibalize its existing portfolio. On the export side, Sri Lanka (20% of exports) increasing import duties on 2W and 3W and Indonesian auto manufacturers projecting de-growth for FY 13 may impact Bajaj Auto’s performance. However, management guided for a 6% growth in Q1 FY13 and to sell more than 3 lakh motorcycles per month this year. They also expect to grow at market growth rate this year.

Mahindra and Mahindra – (TP- Rs783, BUY) – Auto segment strong, FES segment subdued…

M&M sold 40,719 units in the auto segment, a 27% growth yoy which was a good number for M&M. Passenger UV sales in the month grew by 33% yoy to 20,558 units, which was a slight decline mom. The yoy sales growth came on the back of the new launch of XUV500. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 37% growth yoy as the LCV segment continued to grow at a strong pace indicating expansion in the total sub 1 tonne LCV market. Export declined significantly to 1,420 units. Farm Equipment Segment (FES) which had posted a very robust growth of 71% in October almost halved in November, and moved down even further to 15,315 units in December and continued to go down with a negative growth of 6% yoy in January. This negativity went further deep in February, as M&M reported 20% dip in this month on issues of increasing delinquencies on the agri credit, slowdown of farm yields and overall tepid growth in Indian economy. However, March showed some revival in tractor sales on a mom basis, as they sold 17,405 units, almost a 15% growth mom. In April, again the segment showed slight weakness as sales fell by 8% mom and 13% yoy.

Maruti Suzuki – (TP – Rs 1,300, Underperformer)- Performance lower than expected

Maruti Suzuki (Maruti)‘s sales in this month came at 100,415 units as compared to 97,155  units, 3.4% growth 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 26.4% yoy. The compact segment comprising Swift, Ritz and Estilo showed a solid growth of 43% as demand for diesel cars is moving northwards on the backdrop of gap between petrol and diesel prices increasing and the production of high demand new Swift getting back to normalcy of >17,000 units per month.  Vans segment de-grew by 10% yoy as vehicles such as Omni and Eeco underperformed. In the SUV segment, the launch of Ertiga led to s strong growth to 5,593 units v/s 217 units yoy. Dzire model grew by 31.5% as the new diesel model consistently performed. SX4 model declined heavily by about 70% yoy as there was dearth of diesel engines. Exports grew by just 1.5% yoy, while de-growing by 32% mom to sell 10,160 units. Any further rate cut by the central bank of India may have a positive impact on the volumes, while petrol price hike will impact sales adversely. State level levy of extra excise duty on cars will impact sales in those states in coming months(eg:- Maharashtra). Restriction on the expansion of diesel engine capacities 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- Rs318, BUY)- Negative surprise

April sales for the company were lower by 7% yoy, while on mom basis, they fell by a huge 40%. CV sales dropped by 6% yoy, out of which LCV sales were up by 9% 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 29% yoy as macro weaknesses surfaced in the month. PV segment sales fell by 7% yoy which was arrested upto some extent due to Indica range which was up 63% yoy on new launch of Indica Vista launched a quarter back. Utility segment sales went up by 5% yoy. Indigo range sales were down by 31%. Nano sales declined to 8,028 units which was a decline of 20%. Although the domestic business has underperformed this month, on a broad basis, it has performed well in the past and the contribution of domestic business to the total profits is just 20%, which leads us to maintain BUY on Tata Motors as JLR business is outperforming.              

TVS Motor – (TP- Rs 50, Neutral)- In line with expectations

TVS sold 1.74 lakh units in April in line with our subdued estimate. This was a de-growth of 4% mom and a growth of 4% yoy. Motorcycles de-grew by 4% yoy, while scooters grew by 2% yoy. 3 Wheelers have continued their underperformance as they declined 19% yoy to 2,961 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 TVS will be a laggard in the 2W segment.

4-Wheelers marching ahead in March…

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4-Wheelers marching ahead in March…

The month of March witnessed an expected surge in auto volumes as pre budget buying was prevailing in the first half of the month and since there was no negative news for diesel cars except the expected hike of 2% in the excise duty across the board, the cheer continued in the second half as well. Seasonally a strong month – March saw companies like Tata Motors, Maruti and M&M (our top picks in that order) post all time high monthly sales numbers with each of their segments performing well. With Tata Motors touching the magic figure of 1 lakh, Maruti crossing its pre strike volume number and M&M with its new launches helping them to put up a record high in UV sales the auto industry saw a firm uptick. On the other hand, TVS continued its disappointment, signaling that Honda is taking its toll on their performance . Each of their segments saw a sharp fall in growth- thus showing fundamental weakness. TVS’s peers also posted a subdued show, however better than TVS. 2 wheeler companies have given a word of caution stating that they are still in a slowdown mode and there is nothing motivating to predict a bullish overtone to the 2 wheeler space in the coming year as of yet.

 

Ashok Leyland (TP – Rs30, Neutral)

Ashok Leyland’s March sales exceeded our expectations, as they sold 14,285 units, a growth of 17% yoy. This constituted the newly launched LCV Dost which sold 2,211 units, while the actual MHCV volumes declined by 0.8% yoy to 12,074 units. However, MHCV sales grew by 27% mom and LCV sales grew by 40% mom. The total sales surpassed Ashok Leyland’s full year target of 1 lakh units. In FY 12, the company grew at a pace of 8.4%. The company sold 94,416 MHCVs and 7,593 LCVs in FY12. Improvement in South Indian markets will remain a key to success in FY13.

 

Bajaj Auto (TP – Rs 1,620, Neutral)

Bajaj posted just 9% yoy growth in March and a 4% dip on mom basis. Motorcycles grew by 10% yoy while 3 wheelers grew by 4% yoy. Despite March being a strong month for auto industry, Bajaj like its peers posted a soft performance, below our expectations. In FY 12, the growth was 14%, while the company estimates to grow at 15% in FY 13, which we believe is a bit too optimistic considering the difficult operating environment in the midst of a slowdown. Exports of the company will also feel the heat with Sri Lanka (20% of exports) increasing import duties.

 

Hero Motocorp (TP- Rs 2,000, Neutral)

Hero posted a flattish growth in March at 5.28 lakh units, while on a yoy basis it was a growth of just 2%. The subdued performance of two wheelers signifies slowdown and sluggishness in the domestic two wheeler industry. However, competition from Honda may eat up the market share of TVS ( which has already started to happen), followed by Bajaj and then compete with Hero as the gap between the scale of Hero and Honda is very wide. Hence, we believe that within 2 wheelers, Hero is one of the stocks to look at.

 

Mahindra and Mahindra – (TP- Rs783, BUY) – Auto segment sails through, FES segment recovers…

M&M sold 47,001 units in the auto segment, a 25% growth yoy which was a stellar figure for M&M, a record high. This performance was better than our expectations. Passenger UV sales in the month grew by 30% yoy to 21,257 units, which was 14% growth mom. The strong sales on the recently launched XUV 500 and the new Xylo led to this strong growth. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 28% 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 1,763 units up a mammoth 73% yoy v/s 1,619 units in February. Export sales moved up by 31% yoy  to 2,659 units, however, this was flattish mom. Farm Equipment Segment (FES) which had posted a very robust growth of 71% in October almost halved in November, and moved down even further to 15,315 units in December and continued to go down with a negative growth of 6% yoy in January. This negativity went further deep in February, as M&M reported 20% dip in this month on issues of increasing delinquencies on the agri credit, slowdown of farm yields and overall tepid growth in Indian economy. However, March showed some revival in tractor sales on a mom basis, as they sold 17,405 units, almost a 15% growth mom. However, yoy they declined by 12%.  In FY 12, the company’s auto sales grew by 28%, while FES ended the year with just 10%, v/s 17-18% projected growth by management in October.

 

Maruti Suzuki – (TP – Rs 1,475, BUY)- Performance in line with expectations.

Maruti Suzuki (Maruti)‘s sales in this month came at 125,952 units as compared to 121,952  units, 3.3% growth on yoy basis, while on mom basis it was up by 6%. 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 10% yoy. The compact segment comprising Swift, Ritz and Estilo showed a solid growth of 23.6% as demand for diesel cars is moving northwards on the backdrop of gap between petrol and diesel prices increasing and the production of high demand new Swift getting back to normalcy of >17,000 units per month.  Vans segment grew by 146% yoy as the pre-launch dispatches of Ertiga started in March itself. Only the SX4 model faced a huge decline of about 58.1% yoy as there was dearth of diesel engines. Exports grew by 14.7% yoy, while growing at 17% mom to sell 13,228 units with non European geographies like Asia-Pacific, CIS countries and Africa showing growth momentum . In line with the new Dzire model launched in February, it has started creating a base of 15000-16000 units per month as it grew 60% yoy to 16,541 units in March. 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. Status quo maintained on diesel cars taxation is a good news for Maruti and the cheer is expected to continue in coming months though 2% excise duty hike getting passed on have made cars costlier. State level levy of extra excise duty on cars will impact sales in those states in coming months(eg:- Maharashtra). Expansion of diesel engine capacities will help the company to cater to the bludgeoning demand for diesel cars. In FY 12, Maruti’s sales de-grew by 10.8% on competition, fuel price hikes, interest rate increase and strikes at the Manesar plant.

 

Tata Motors – (TP- Rs318, BUY)- Record high!

March sales for the company were at a record high of 100,414 units, 20.5% up yoy and 9% up mom. CV sales grew by a healthy 16.7% yoy, out of which LCV sales were up by a healthy 37% 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 5.8% yoy while growing by 13.7% mom. PV segment sales have started to pick up since last quarter as they grew by 33.6% yoy on strength coming from Indica range which was up 64.6% yoy mainly on prebuying effect of budget and on new launch of Indica Vista launched a quarter back. Utility segment sales went up by 40.5% yoy. Indigo range sales were also up by 15% after underperforming in February. Nano sales were the star performer as they grew smartly up at 10,475 units, 20.3% up yoy and 13.6% mom. Continued strength in CV business aided by LCVs and robust PV sales have led to a continuous solid growth in volumes of the company. Total FY 12 growth of the company has been 13.3%.              

 

TVS Motor – (TP- Rs 50, Neutral)- Seasonally up… though the broad picture remains negative

TVS sold 1.83 lakh units in March in line with our subdued estimate. This was a de-growth of 4% yoy and a growth of 6% mom. Motorcycles de-grew by 17% yoy, while scooters fell by 7.6% yoy. However, the low cost mopeds performed well by growing 16% yoy. 3 Wheelers have continued their underperformance as they declined 33% yoy and 26.5% mom. In FY 12, TVS sales grew by just 7.9%. 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 TVS will be a laggard in the 2W segment.

Seasonality takes its toll on the auto numbers

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April sales numbers for most of the auto companies were modest on a month on month (m-o-m) basis as per our expectations. The softening of auto sales in April is a seasonal factor as auto companies push volumes at the dealers’ end before the financial year end. Hence on a sequential basis, the volumes have fallen as per our expectations. We expect  approximately a mid teen digit of growth in the auto segment, which may wary according to the sub sectors within the segment – PV(15-17%), 2W(12-13%) and CV(13-14%). However, stock based outperformers in the sector will be M&M (unique portfolio of products, dependence on rural markets and market leadership with a significant margin), Bajaj Auto (increasing market share, strong export presence and dual brand dependence) and Tata Motors (CV market leader and strong international business) remain our top picks within the auto sector.

Hero Honda – (TP – Rs1,527, Underperform)

Hero Honda reported a 39% yoy strong growth to 5.17 lakh units in March, while it was a flattish growth mom. With this strong growth, the company has continued its strong run with a wide portfolio of products. Going forward, with the Honda split done, the company will face strong competition from Honda, raising concerns regarding R&D and maintaining the brand name. Furthermore, the company has to pay royalty of Rs24bn to Honda over next 3 years, which will raise the royalty as a % of sales to 3.5-3.8% from current 2.8%. This will impact margins negatively. Margins to get impacted on this account and also due to additional spending the company have done on advertising during Cricket World Cup in Q4 FY11. New production plant, opportunities in export markets and new launches can trigger the stock price in the medium to long term.

Bajaj Auto – (TP – Rs 1,680, BUY)

Bajaj Auto reported a 17% yoy growth in total sales in March to post sales of 3.67 lakh units. The monthly sales were significantly up by 22% on mom basis, as the company’s exports of 32,000 units were in transit last month due to crisis in the Middle east and North Africa. Excluding the impact of that, the sales would have grown by 6% mom. Management expects the recently launched Discover 125cc to add volumes of 30,000 per month, which along with the addition of 130 new dealers will lead to Bajaj Auto looking at monthly sales in the vicinity of 4lakhs this quarter. Also the company has enhanced its 3 wheeler capacity to 45,000 units per month, which will help the company to achieve its new year target.

Mahindra and Mahindra – (TP- Rs 861, BUY)

M&M reported a strong 23% yoy growth in its auto segment to 32,090 units, with passenger UV sales growing 15%yoy and the 4W pick-up segment which includes Gio and Maxximo posting a 16% growth yoy. Verito, the new name of Logan has posed yet another month of improved sales performance with a growth of 232% yoy will sales recorded at 1,006 units. This has been a very consistent performance from Verito which is expected to get a further lift in performance post M&M brand getting associated with it shortly. LCV and MHCV sales also saw a growth of 9% yoy in a month which is usually dull.  Farm Equipment Segment (FES) posted a very robust growth of 14% yoy to 18,530 units, while sequentially they were slightly down. In April, M&M launched the Maxximo minivan at Rs3.2lakhs which is expected to add to the PV segment of M&M along with Verito. M&M expects May and June to see strong tractor sales. New plant at Zaheerabad will significantly boost tractor sales in the medium term.

Maruti Suzuki – (TP – Rs 1,441, Neutral)

Maruti Suzuki (MSIL) reported their lowest sales since June 2010, by selling ~97,155 units in April, a growth of 4.4% yoy and a dip of 22% mom, in a seasonally dull month. A3 segment was the top performing segment with 39% yoy growth, due to the launch of SX4 diesel variant launch last month and strong Dzire sales. Kizashi sales were at 35 units. C segment sales were up by 22.2% due to strong demand for Eeco in taxi segment as well.  Exports deteriorated to ~10,000 units , down by 23% yoy as well. The overall sentiment in the PV market is slightly weakening as footfall conversion ratio is decreasing on higher interest rates and rising fuel prices. The capacity expansion coming up in the coming 1.5 years will lead to significant jump in the company’s volumes and topline, however in the short term, the company will struggle maintaining its margins against appreciating yen leading to higher royalty payouts, vendor issues rising from Japanese crisis, increasing fuel costs, inflation  and rising commodity prices.

Tata Motors – (TP – Rs 1650, BUY)

April sales for the company were at 64,383 units, 13% up yoy and a 23% fall mom. The company had already guided rationalization of production to balance the inventories at the dealer’s, in line with which the company produced 10-15% lesser than March. CV sales grew by 19% yoy, out of which LCV sales were up by 28% yoy and MHCV sales were 6% higher yoy. PV segment sales went up slightly by 4% yoy and were down by ~20% mom to 25,436 units while utility segment sales grew by 15% yoy on the success of newly launched Aria.  Indica range continued to see a de-growth of 53% yoy as competition in the hatch back segment continued its intensification with the market leaders Maruti and Hyundai feeling the heat. Indigo range sales were also low by 27% yoy. Nano sales were the exception with higher m-o-m numbers at 10,012 compared to 8,707 units in March and 500 units in November.

TVS Motor – (Under Review)

TVS sold 1.67 lakh units in April, a growth of 14% yoy, while on a mom basis it showed decline a 13% growth. This decline was due to usually weak April. Management is expecting the export volumes to pick up in the coming months while domestic volumes to get slightly impacted by interest rate hike, but will get support from the higher utilization rates with higher expected demand.

From the desk of Ashwin Patil

Written by Fundamental Side

May 3, 2011 at 4:24 pm

Surpassing yearly targets!

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Key Observations:

March sales numbers were significantly above our expectations as all the auto companies posted outstanding sales in the month aided by the strong seasonality factor, wherein auto companies try hard to push their products before the financial year ends. This doesn’t mean that the sales momentum was purely because of the push at the dealers’ end, but it also confirms the continuation of the robust demand in the auto sector, thus enabling a few companies to not only meet their yearly guidance but also surpass them. Going forward, in FY 12, the growth rate of the auto sector will not be as robust as it was in FY 11 mainly due to the high base effect, interest rate hikes, higher fuel costs and inflation. We expect  approximately a mid teen digit growth in the auto segment, which may wary according to the sub sectors within the segment – PV(15-17%), 2W(12-13%) and CV(13-14%). However, companies which have a unique product portfolio(M&M), increasing market shares on account of new launches and scalability(Bajaj Auto), deeper penetration in the rural markets( M&M and Maruti Suzuki) and a strong international presence(Tata Motors) will have an edge over their competitors.

Hero Honda – (TP – Rs1,527, Underperform)

Hero Honda reported a 24.4% yoy strong growth to 5.15 lakh units in February, while it was a growth of 9% mom. With this strong growth, the company has surpassed its full year guidance of 5 mn selling 5.4mn units in FY 11. This was on the back of 7 new launches including variants and refreshes in FY 11. Going forward, with the Honda split done, the company will face strong competition from Honda, raising concerns regarding R&D and maintaining the brand name. Margins remain to get impacted on this account and also due to additional spending the company has done on advertising during Cricket World Cup in Q4 FY11 . New production plant, opportunities in export markets and new launches can provide a trigger to the stock price in the medium to long term.

Bajaj Auto – (TP – Rs 1,680, BUY)

Bajaj Auto reported a 12% yoy growth in total sales in March to post sales of 3.07 lakh units. The monthly sales were 6% down on mom basis, as the company’s exports took a hit on account of crisis in Middle East and North Africa region, but one should not read further into it, as 32,000 vehicles are in transit and will be accounted additionally in April sales. The company ended this year short of their guidance of 4mn units due to vendor constraints and export performance in March. In March, the company sold 75,000 Pulsars and 1,25,000 Discover units. In FY 12, the company expects to sell 4.6mn units which will be a growth of 20% over FY 11, out of which, 4.1mn will be two wheelers and 0.5mn will be 3 wheelers. Out of the two wheelers,  1.1-1.2 mn will be Pulsars, 1.7-1.8mn will be Discover, while the rest will be Platina and Boxer. The company has recently launched Discover 125cc bike and is expecting to bring its international bike Boxer in the Indian markets which will help boost its volumes. They are also increasing their dealer base by 130 from April. Also the company has enhanced its 3 wheeler capacity to 45,000 units per month, which will help the company to achieve its new year target.

Mahindra and Mahindra – (TP- Rs 861, BUY)

M&M reported a strong 18% yoy growth in its auto segment to 37,522 units, with passenger UV sales growing 14%yoy and the 4W pick-up segment which includes Gio and Maxximo posting a 15% growth yoy. Maxximo now has 23% market share in the geographies where it is launched. Logan has posed yet another month of improved sales performance with a growth of 190% yoy will sales recorded at 1,018 units. This has been a very consistent performance from Logan which is expected to get a further lift in performance post M&M  brand getting associated with it shortly. LCV and MHCV sales declined  by 11% yoy, as the Navistar JV is at its initial stage and will take some time to enter strongly in the higher tonnage market with a stronger product portfolio. Farm Equipment Segment(FES) posted a very robust growth of 23% yoy to 19,848 units, while sequentially they were up by 4%. In the year FY 11, the Auto and the FES segments have grown by 26% and 22% respectively. M&M is setting up a new Tractor plant at Zaheerabad, AP, with a capacity of 1,00,000 units for an investment of Rs3bn, the production of which is expected to start in FY 2012.

Maruti Suzuki – (TP – Rs 1589, BUY)

Maruti Suzuki (MSIL) reported their highest ever sales by selling ~1,21,952 units in March, a growth of 28% yoy and 10% mom, thus taking their full year volumes beyond their target of 1.2mn at 1.27mn. The company for the first time in this year showed a growth in the A1 segment (M800) of 5.5% yoy, which we believe is a temporary phenomenon. However, it has reported a whopping 43% and 33% growths in A2 and A3 segments. The higher sales of A3 can be attributed to the launch of SX4 diesel in March, which would mean higher margins for Maruti.  The newly launched premium segment car Kizashi which falls under the A4 segment sold 103 units in March. This will not only add to the top line, but will also add up to the margins as it is a highly priced model, however its demand is yet to be gauged in India where the demand is primarily for the hatch back low cost cars. The C segment which includes the Eeco continued to show a good expansion of 32% rise on a yoy basis as Eeco also finds demand from public transportation i.e. the taxis (20% demand). Exports continued to slide down by 26% as non Western European markets are yet to show signs of pick up and it also reflects the crisis in West Asia, North Africa and Japan upto some extent. The company has missed its full year export target of a flat growth in FY 11 as the company has posted a 6% fall this year . However, the boom in the domestic PV market was strong enough for the company to surpass its overall sales target for FY 11 which was 1.2 mn. The capacity expansion coming up in the next 1.5 years will lead to significant jump in the company’s volumes and topline, however in the short term, the company will struggle maintaining its margins against appreciating yen leading to higher royalty payouts, vendor issues rising from Japanese crisis, increasing fuel costs, inflation  and rising commodity prices.

Tata Motors – (TP – Rs 1650, BUY)

March sales for the company were extremely strong with a 7% mom growth and a 11% yoy growth to 83,363 units, the highest ever sales for the company defying macro concerns like interest rate hikes and inflation worries. CV growth again gained pace after a subdued February, as they grew by 15% yoy, while  M&HCV grew by 12% yoy and LCV grew by 18% yoy. PV segment sales declined by 1% yoy to 29,543 units while utility segment sales grew by 24% yoy on the success of newly launched Aria.  Indica range continued to see a de-growth of 40% yoy as competition in the hatch back segment continued to intensify with the market leaders Maruti and Hyundai continuing their solid run. Indigo range sales were also low by 5% yoy. Nano sales were higher m-o-m at 8,707 units vis-à-vis 8,202 units in February (on strong marketing initiatives) and the low hit in November performance of just 500 units. Cumulative sales of Nano are ~71,000 way below their expected full year target of >100,000 units. In India, JLR sold 891 units v/s 242 sold In FY 10. In FY 11, Tata Motors sold 803,322 units, a growth of  25% yoy.

TVS Motors – (TP – Rs86, BUY)

TVS sold 191,208 units in March, a growth of 28% yoy, while on a mom basis it showed a 7.9% growth. Consistent performance from the 2 wheeler and 3 wheeler segments led to such a strong performance from TVS leading the company to surpass its full year target of 2mn to 2.04mn. In March, three wheeler sales were at 4,427, up on mom basis. Scooter sales were 50% up to 42,655 units, while motorcycles were up 24% yoy to 79,462 units. The company has also showed good traction in the exports business(14% of volumes). Management is expecting export volumes to pick up in the coming months while domestic volumes to get slightly impacted by interest rate hike, but will get support from the higher utilization rates post capacity expansion happened in FY 11.

From the desk of : Ashwin Patil

Written by Fundamental Side

April 4, 2011 at 3:40 pm