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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.

 

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Two wheelers hit a roadblock, 4 wheelers better than expectations

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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.

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

No brakes….only accelerator!

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Automobile sales for February

February auto sales numbers were above our expectations as all the auto companies posted outstanding sales in the month, thus resulting in a rally in their stock prices. We believe the strong consumer demand and pre- budget buying of vehicles resulting from expectation of an excise duty rollback are the main reasons for auto sales booming in a month which is seasonally lackluster and has lesser number of working days. Going forward, with positives coming out of the budget for the sector, we do not believe the expected hike in interest rates will have a significantly negative impact on the sector in the medium to long term.

 

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

M&M reported a strong 20% yoy growth in its auto segment to 33,378 units, with passenger UV sales growing 12%yoy and the 4W pick-up segment which includes Gio and Maxximo posting a 13% growth yoy. Maxximo now has 21% market share in the geographies where it is launched. Logan has posted yet another month of improved sales performance with renewed product and marketing efforts from the company post their split with Renault. In February, M&M sold 1,151 units of Logan as compared to 537 units in February 2010 and 1120 units sequentially. LCV and MHCV sales grew by 5% yoy, on account of the increase in the sales of LCVs and M&HCVs from Mahindra Navistar JV. Farm Equipment Segment(FES) posted a very robust growth of 37% yoy to 19,041 units, while sequentially they declined by 1.5%. On a cumulative basis, the company has grown by 27% and 22% in the auto and FES segments respectively.

 

Maruti Suzuki – (TP – Rs 1589, BUY)

Maruti Suzuki (MSIL) once again held to their promise of selling ~1,10,000 units per month in FY 11 as they sold 1,11,635 units after selling 1.09 lakh units in January, which translates into a 2% mom growth in sales. The sales grew by 15.5% yoy. MSIL have sold 1.14 mn units cumulatively. In the full year we expect it to sell 1.2mn units and post FY11E, management expects to sell 1,16,000 units per month (1.4mn p.a.). Within the segments, the bread and butter A2 segment of hatch backs posted 19.4% growth, while the A3 segment witnessed 27% yoy growth. The newly launched premium segment car Kizashi which falls under the A4 segment sold 25 units in February which were just for the purpose of test drive for dealers, while it will start commercial sales from March onwards. This will not only add to the topline, 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 contains the Eeco also showed a good expansion of 27% rise on a yoy basis as Eeco also finds demand from public transportation i.e. the taxis. Exports continued to slide down by 15% as non Western European markets are yet to show signs of pick up. We believe the company will miss their export guidance of flat growth in FY 11E in exports as they may run short of 10,000 units of their export targets as they have sold 1.26lakh cumulatively in exports. However, the boom in the domestic auto car market is strong enough for the company to meet its overall sales target of FY 11 which is 1.2 mn.

Tata Motors – (TP – Rs 1650, BUY)

February sales for the company were extremely strong with a 3% mom growth and a 12% yoy growth to 77,543 units, the highest ever sales for the company defying the macro concerns like interest rate hike and inflation worries. CV growth pace was a bit subdued, as M&HCV grew by 1% yoy, while LCV grew by 8% yoy. Overall CV sales grew by 5% yoy, pointing towards a slight slowdown in the CV industry. PV segment grew by 18% yoy to 26,985 units while utility segment sales grew by 16% yoy.  Indica range continued to see a de-growth of 12.7% yoy as competition in the hatch back segment continued its intensification with the market leaders Maruti and Hyundai continued their solid run. Indigo sales saw a sales growth of 22% yoy. Nano sales were higher m-o-m at 8,262 units vis-à-vis 6,703 units in January and the low hit in November performance of just 500 units on attractive  marketing ventures. Cumulative sales of Nano are ~62,000 way below their expected full year target of >100,000 units.

 

TVS Motor – (TP – Rs86, BUY)

TVS sold 177,412 units in February, a growth of 24% yoy, while on a mom basis it showed a 7.2% growth. The sequential sharp jump was due to a temporary maintenance shutdown of its plants in the month of January. Three wheeler sales crossed the 4,000 mark for the first time as it sold  4,212 units. Scooter sales were 49% up to 40,335 units, while motorcycles were up 13% yoy to 71,462 units. Going forward, the company has maintained its annual guidance of 2mn vehicles in FY 11E which we believe will be a cakewalk as the company has cumulatively sold 1.855 mn units and March being a strong month, selling 1.45 lakh units will be very easy. Management is expecting the export volumes(14% of sales in Feb 2011) to pick up in the coming months while domestic volumes to get slightly impacted by interest rate hike, though we believe that 2 wheelers will not get significantly impacted by it.

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

Hero Honda reported a 23% yoy strong growth to 4.72 lakh units in February, while it was a growth of 1.3% mom. We believe the company will face strong headwinds going forward as Honda goes solo in the Indian markets aggressively and the company underperforms its two wheeler peers on margin as well as volume front in the wake of competition.

 

P.S. Bajaj Auto will come out with their February sales numbers on the 02nd of March 2011.

 

Budget impact on auto sectorThe Indian auto sector for the past couple of months was reeling under the macro concerns such as inflation, possible interest rate hikes, input cost rise, fear of excise duty roll back, tax on diesel vehicles and fuel price hike. However, yesterday’s union budget has been a relief for the auto sector as the excise duty wasn’t rolled back. The budget has also promoted the use of hybrid and electric vehicles by cutting various duties on some of the important parts used for their manufacturing. This will assist companies like M&M who have recently acquired Reva an electric vehicle manufacturer and are already into the hybrid vehicle business through a hybrid model of Scorpio . Also companies like Tata Motors and Ashok Leyland have taken some initiatives towards greener vehicles by launching hybrid buses. Recently Ashok Leyland acquired a 26% stake in UK-based Optare which designs electric buses, while Tata Motors is in the process of launching an electric version of Indica and a hybrid version of Nano. Besides this, Tata Motors and M&M are working on electric versions of Ace and Maxximo respectively. We believe M&M emerged as the biggest beneficiary from this budget within the listed auto space as the budget emphasized on spending more on the agri domain where M&M has its major presence through tractors and other farm equipments and micro-irrigation plans. Furthermore, no increased taxation on diesel vehicles has led to a major sigh of relief for M&M as 100% of its vehicles run on diesel.

 

Written by Fundamental Side

March 3, 2011 at 10:11 am

Momentum Continues in Mo-Town

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Automobile sales for January– Macro pressures fail to dampen the momentum

Hero Honda – (TP – Rs1,777, NEUTRAL)

Hero Honda reported a 19.7% yoy strong growth to 4.66 lakh units in January, but it was a ~7% dip mom. We believe the company will face strong headwinds going forward as Honda goes solo in the Indian markets aggressively and the company underperforms its two wheeler peers on margin as well as volume front in the wake of competition.

Mahindra and Mahindra – (TP- Rs 878, BUY)

M&M reported a strong 22% yoy growth in its auto segment to 35,718 units, with passenger UV sales growing 11%yoy and the 4W pick-up segment which includes Gio and Maxximo posting an 18% growth yoy. Maxximo has maintained its 23% market share in the geographies where it is launched. The company has recently announced the launch of another LCV ‘Genio’ priced at Rs5lakhs. Since the termination of JV with Renault, Logan seems to be regaining its lost pride, as it is posting strong growth month on month. In January, M&M sold 1,120 units of Logan as compared to 555 units in January 2010 and 896 units sequentially. LCV sales grew by 28% yoy, marked by the increase in the sales of LCVs from Mahindra NavistarJV. Farm Equipment Segment(FES) posted a very robust growth of 22% yoy to 19,340 units, while sequentially also they grew by 17%. On a cumulative basis, the company has grown by 28% and 21% in the auto and FES segments respectively.

Maruti Suzuki – (TP – Rs 1589, BUY)

Maruti Suzuki (MSIL) once again sold volumes in the vicinity of 1,10,000 units at 1,09,743 units after a lackluster December. This was a growth of 15% yoy and 22% mom. The company has stuck to its guidance of selling 1,10,000 units per month till the end of FY 11E. MSIL have sold more than 1 mn units cumulatively in the interim of the year for the first time. In the full year we expect it to sell 1.2mn units and post FY11E, management expects it to sell 1,16,000 units per month (1.4mn p.a.). Within the segments, the bread and butter A2 segment of hatch backs posted 24% growth, while the A3 segment witnessed 33% growth. The C segment which contains the recently launched Eeco also showed a good traction of 28% rise on a yoy basis. Exports continued to slide down by 36% as non Western European markets are yet to show signs of pick up.

Tata Motors – (TP – Rs 1580, BUY)

January sales for the company were extremely strong with a 12% mom growth and a 15% yoy growth to 75,423 units, the highest ever sales for the company defying the macro concerns like interest rate hike and inflation worries. CV growth pace was robust in the month, as M&HCV grew by 5% yoy, while LCV grew by 17% yoy. Overall CV sales grew by 12% yoy. PV segment grew by 14% yoy to 28,460 units while utility segment sales grew by 26% yoy. Indica range saw a de-growth of 8% yoy as competition has started to intensify in the hatch back segment where the company has a limited product portfolio in the PV segment, especially the hatch backs. Indigo sales saw a sales growth of 17% yoy. Nano sales were higher m-o-m at 6,703 units vis-à-vis 5,784 units in December and a dismal November performance of just 500 units on attractive marketing ventures. Cumulative sales of Nano are ~53,000 way below their expected full year target of >100,000 units.

TVS Motor – (TP – Rs86, BUY)

TVS sold 165,152 units in January, a growth of 30% yoy, while on a mom basis it showed a 4% decline. The sequential drop was due to a temporary maintenance shutdown of its plants in the month of January. Three wheeler sales came at 3,427 units. Going forward, the company has maintained its annual guidance of 2mn vehicles in FY 11E by selling more than 1.75 mn units per month in the remaining two months. Management is expecting the export volumes to pick up in the next two months while domestic volumes to get slightly impacted by interest rate hike, though we believe that 2 wheelers will not get significantly impacted by it.

Written by Fundamental Side

February 1, 2011 at 6:02 pm

LKP reports: Automobile sales for the month December – Back on track

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From the desk of Ashwin Patil.

Mahindra and Mahindra – (TP- Rs 878, Outperformer)
M&M reported a healthy 42% yoy growth in its auto segment, with UV sales growing 24%yoy and the 4W pick-up segment which includes Gio and Maxximo posting a stellar growth of 47% yoy. Logan reported 896units of sales, a growth of 191% marking a revival of the sedan. LCV sales grew by 22% yoy. On a qoq basis, auto sales have grown by 28%. FES segment posted a very robust growth of 31% yoy to 16,334 units on good monsoon and rabi season picking up in the Northern parts of the country. On a cumulative basis, the company has grown by 29% and 21% in the auto and FES segments respectively.

Tata Motors – (TP – Rs 1580, Outperformer)
December sales for the company were very strong with a 23% mom growth and a 31% yoy growth to 67,441 units thus marking the company’s comeback after a lackluster November. CV growth pace was robust in the month, as M&HCV grew by 14% yoy, while LCV grew by 35% yoy with the highest ever monthly sales of the ACE family. Overall CV sales grew by 25% yoy. PV segment grew by 28% yoy to 19,977 units while utility segment sales grew by 62% yoy on the launch of Tata Aria. Indica and Indigo sales saw a sales growth of 40% and 3% respectively, marking a renewed demand for them. Nano sales were back on track at 5,784 units a 60% yoy growth after a dismal November sales which were at just 500 units. We believe this is due to the company’s rejuvenated marketing efforts and pushing volumes to the dealer end.

TVS Motor – (TP – Rs80, Neutral)
TVS reported 171,190 units of sales in December, a growth of 42% yoy and a 9% mom. This signifies a significant spurt in demand for its existing and new bikes post a slump in November. Three wheeler sales came at 3,431 units. Going forward, we expect the company to report numbers of close to 1.8 lakh per month, which will be growth over December numbers due to wholesale demand for its new models Jive and Wego picking up and three wheeler sales picking up in the traditionally strong quarter.

Hero Honda – (Under Review)
Hero Honda reported a 16% yoy strong growth to 5.01 lakh units in December, but it was a ~19% spurt mom. Though the company has cleared clouds over the royalty issue post its split with Honda and has posted stellar monthly sales numbers, we remain cautious on the stock as it will continue to face added pressures from strengthening presence of Honda and aggressive strategies by its other competitors as well. Hence, we will take a closer look at the stock post Q3 results and revise our rating and target price accordingly.

Bajaj Auto – (TP – Rs 1630, Outperformer)
Though Bajaj Auto has posted its best ever December sales, they have fallen well short of their monthly guidance of 3 lakh units as they posted 2.76 lakh sales this month. It was a growth of just 10% yoy and a dip of 18% mom. The company attributes this to capacity constraints and logistic issues. Henceforth they have guided us of getting back to the 3 lakh mark in each of the remaining 3 months.

Maruti Suzuki – (TP – Rs 1788, Outperformer)
Maruti’s December sales were 17% up yoy while 12% down on mom basis at ~99,000 units in line with our expectations as the company had its bi-annual maintenance shutdown at its various plants for 7 days in December. Due to this the production was low and thus sales. Domestically, the company reported sales close to 89,000 units while exports were close to the 10,000 mark as expected. Going forward, we believe Maruti will once again punch volumes anywhere in between 1,10,000 and 1,15,000 for the rest of the year as demand remains intact. For the full year, we expect volumes to be close to 1.2mn.

Visit www.lkpsec.com for more reports & analysis.

Written by Fundamental Side

January 6, 2011 at 7:20 am