India Autos report by Anand Rathi

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India Autos
Sep ’10 results preview: All-time-high sector profitability
 2QFY11 profits to be 21.1% higher yoy. In 2QFY11, the auto
sector volumes grew a healthy 25.1% yoy (7.4% qoq). We expect a
nominal 30-bp qoq improvement in the EBITDA margin (200bp
lower yoy). Consequently, our profit-growth expectation is 21.1%
yoy and 18.4% qoq.
 Healthy volume growth. Auto companies have seen a healthy
25% volume growth in the past 15 months. Demand outlook for
the industry is sound, although the higher base indicates that the
growth rate would be lower in 2HFY11. We expect a steady
EBITDA margin in 2Q compared with 1Q (albeit lower yoy),
while profit growth would be robust, driven by CV and twowheeler
companies.
 CVs, two-wheelers to be best performers. Ashok Leyland, Bajaj
Auto, Tata Motors and TVS Motors would be the standout
performers in 2Q. Escorts, Maruti and M&M would clock steady
profit growth, while Hero Honda’s profits are expected to decline
yoy. However, all the companies would register a good qoq
growth rate.
 Outlook. Based on the robust volume growth and sustained
better operating performance, we maintain our Overweight stance
on the Indian auto and auto parts sector. Potential dampeners are
the possibility of higher interest rates and vendor capacity
constraints at present.