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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

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Written by Fundamental Side

May 3, 2011 at 4:24 pm