AUTOMOBILES We expect the Auto sector to post yet another quarter of strong earnings
growth on the back of: (i) continued volume growth momentum in all
segments; and (ii) pricing action taken by most OEMs to partially offset the
increase in commodity prices. Given the low base effect, domestic CV segment
volume growth during the quarter stood at 32% YoY while passenger vehicles
and two-wheelers grew by 33% YoY and 24% YoY respectively.
On an aggregate basis, our Auto coverage universe is expected to report a
topline increase of 38% YoY. We expect sequential improvement in margins
due to marginal reduction in base metals on a QoQ basis. However, the gains
from lower input costs would be minimized due to escalations given on critical
components (FIP and batteries) to compensate the vendor for sharp rise in
labor, power etc. Given the relatively stable fixed cost trends, we expect
earnings growth for our universe to increase by 109% YoY.
In 2HFY11, we expect volume growth across the sub-sectors to show
moderation as the base effect benefits start waning. Further, with abating
capacity constraints, demand-supply equation may turn unfavorable thereby
resulting in higher competitive intensity. Key commodity prices have been
trending upward; this could result in higher margin pressure in the ensuing
quarters.
Our top pick in the sector is Tata Motors. We believe JLR’s profitability trends
are likely to remain robust. Further, with a positive view on the CV upcycle,
Tata Motors stands to remain a default beneficiary.
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