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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.

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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.

Good come back!

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Good come back!

 Better than expected January performance surprised us as December was quite a low for many of the companies. Maruti was more than a surprise as quickly getting back to recovery after abysmal October sales was not expected. However, sustainability of the same is a question as government’s stand on diesel vehicles will play a big role in future sales of Maruti. Also, competition, and higher fuel prices are still downside risks for the company. M&M put up a robust show on the auto side and is expected to excel further as XUV500 sales gains momentum. On FES side, the performance was down yoy, but showed a good pull back sequentially. Tata Motors stunned one and all on the street as all of its segments showed a strong performance. CV sales were buoyant on strong LCV sales, while PV sales were up on strong Indica and Indigo sales. TVS was a big disappointment as its market share is getting cut on strong competition all around. Given the rally witnessed in stock prices, currently we believe that the valuations of most of the auto companies seem stretched. Hence, we are neutral to underperformer on most of the auto stocks now. We however maintain Buy on M&M and Ashok Leyland.

 

Hero Motocorp – (TP – Rs1,996, Neutral)Still holding on…

HMCL sold 5.2 lakh unts in January, which was a 11.55 yoy growth and a fall of 3.7% mom. This was slightly lower than our expectation of 5.25 lakh units. The YTD growth of the company now stands at 17.4%, the strongest among the two wheeler companies, while we are expecting 15% growth in FY 12. HMCL has been the only two wheeler company which is still showing traction in growth vis-à-vis other players who have shown moderation. A sudden fall in mom volume growth cannot be ruled out if HMCL is pushing volumes to the dealers.

 

Mahindra and Mahindra – (TP- Rs772, BUY) – Auto segment posts strong performance, FES slows down further

M&M sold 44,718 units, a 22% growth yoy while it was a growth of 5% mom. This performance was better than our expectations. Passenger UV sales in the month grew by 15% yoy to 18,446 units, which was 2% 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 1,529 units up 37% yoy v/s ~1,300 units in December. Export sales moved up by 95% yoy  to 3,348 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 in November, and moved down even further to 15,315 in December has posted a negative growth of 6% yoy in January. This was still better than what we had expected and is above the December number of ~15,500. Opening up of bookings for XUV 500 again in 19 cities of India in January will lead to a better volume performance from this model in FY 13. Since the booking have opened, XUV 500 has registered bookings of more than 5,900 units. 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 1015, Underperformer)- Strong recovery

Maruti Suzuki (MSIL)‘s sales in January came at 115,433 units as compared to 92,161 units, 25% growth on mom basis, while on yoy basis it  was up by 5.2%. 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 2.4% yoy. The compact segment comprising Swift, Ritz and Estilo showed an improvement as demand for diesel car is moving northwards on the backdrop of gap between petrol and diesel prices increasing.  Vans segment also declined by 11% yoy, but showed a good growth of ~40% mom. Exports were the star performer again as they grew by 54.3% yoy as they sold 14,386 units a jump over ~9300 units yoy, while mom, it was lower by 300 units only. However, SX4 and Dzire segments posted yoy de-growth, at 12% and 10% 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 and on the other hand any call on the diesel cars in upcoming budget may hamper diesel car sales. Launch of Ertiga needs to be watched out as low ground clearance may pose a setback to the company while pricing between Rs7-8 lakh will push sales.

 

Tata Motors – (TP- Rs253, Neutral)- Stellar performance!

January sales for the company were at 87,465 units, 16% up yoy and 6% up mom. CV sales grew by a healthy 14% yoy, out of which LCV sales were up by 15% 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 11%, which was a strong growth again. PV segment sales have started to pick up since last couple of months as they grew by 14% yoy on some strength coming from Indica range which was up 9% yoy on new launch of Indica Vista launched a quarter back. Utility segment sales went up by 38% yoy. Indigo range sales were smartly up by 10% yoy. Nano sales grew at 7,723 units  15% up yoy and showing a quick recovery over the past few months and lows hit at 500 units in November 2010. Continued strength in CV business aided by LCVs and recovery in PV sales have led to a solid growth in volumes of the company.

 

TVS Motor – (TP – Rs55, Underperformer)- Losing out to competition

TVS sold just 1.73 lakh units in January missing our estimate of 1.82 lakh by a good margin. This was a growth of just 3% mom and 5% yoy. Scooters segment grew by just 2% yoy to 41,469 units, while motorcycle sales in January reported a de-growth of 5%. Three wheelers are posting a consistently disappointing performance as the company sold just 2,402 units v/s 3,427 units a year ago. Mopeds segment, which is the major volume earner for TVS declined by 13.8% yoy to 45,937 units v/s its monthly run rate of~64,000 units. With rising competition in the scooter segment, slowdown in motorcycle segment and structural weakness in 3wheeler segment , we now believe TVS will be a laggard in the 2W segment.

 

Written by Fundamental Side

February 8, 2012 at 6:32 pm