2Q FY11 preview; India Auto – Volume boost, margin likely up says Standard Chartered

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India Auto Sector
2Q preview – Volume boost, margin likely up
We expect auto companies’ profits to be 115% higher yoy in 2Q FY11 given better volume
(up 25.8% yoy). We further expect EBITDA margin to improve 240bps yoy (remain flat qoq)
given stable to lower commodity costs and better operating leverage.
 Strong volume growth – In 2Q, sector volume grew a strong 25.8% yoy and 7.9% qoq, with
two-wheeler volume rising 26% yoy (8.6% qoq) and four-wheeler increasing 25% yoy (4.9%
qoq). Among four wheelers, commercial vehicles grew 35.4% yoy (9.8% qoq). We expect
sector revenue to grow 33.3% yoy (8% qoq); four-wheeler revenue is likely to be up 33.9%
yoy (7.5% qoq), mainly due to the strong performance of CVs. Given the overall improvement
in product mix, we expect revenue to grow more than volume (33.3% yoy, 8% qoq).
 Margin likely to improve 240bps yoy – We expect EBITDA margin to improve 240bps yoy,
though remain flat qoq. Stable to lower raw material costs qoq and higher volumes in 2Q are
likely to improve operating leverage for the sector. We expect sector EBITDA to grow 61.3%
yoy and 8.4% qoq; two-wheeler EBITDA to grow 19.1% yoy (17.8% qoq) and four-wheeler to
grow 79.3% yoy (6% qoq).
 Volume outlook upbeat – We expect volume to continue growing given India’s strong macro
drivers: fast-growing per capita income, favourable demographics, shifting consumption
patterns and easier credit availability. However, higher interest rates, rising commodity prices,
price increases to mitigate higher costs and compliance with BS emission norms could be
risks in the short term (2H 2010).
 Valuations to catch up with broader market – Given the auto sector’s superior earnings
growth compared with the Sensex estimate (43% vs 20%), we expect the sector’s current
~20% discount to Sensex multiples to narrow significantly. We, in fact, expect sector
valuations to perform better than the historical average discount of 10-12%. Maruti Suzuki,
Tata Motors, Bajaj Auto and Mahindra & Mahindra remain our top picks.


2Q FY11 preview
Profits likely up 115% yoy: We expect auto companies’ profits to be up 115% yoy given better
volume (up 25.8% yoy). While we expect two-wheeler profit to increase 25.9% yoy (19.4% qoq),
four-wheeler PAT (including consolidated Tata Motors) is likely to increase strongly by 200% yoy
(4.3% qoq), in our view.
Revenue to grow on volume, improving product mix: In 2Q, sector volume grew a strong
25.8% yoy and 7.9% qoq; two-wheeler volume grew 26% yoy (8.6% qoq) while four-wheeler
volume grew 25% yoy (4.9% qoq). Within the four-wheeler segment, commercial vehicles
showed strong growth of 35.4% yoy (9.8% qoq). Given the overall improving product mix, we
expect revenue to grow more than volume (33.3% yoy, 8% qoq).