Automobiles: Seasonally weak 2Q turns favourable
2Q saw surprisingly strong qoq volume growth and favourable material costs. We
see Ashok and Bajaj showing particularly positive results thanks to market share
gains as the M&HCV and 3-wheeler segments post high qoq growth. The benefit
of good monsoon and oil price fluctuations should be the key variables to watch.
Market share gains for Bajaj and Ashok as 3-wheeler and M&HCV segments grow qoq
India’s automobile industry saw surprisingly sharp qoq volume growth in 2QFY11, notably in
three-wheelers (+37%), medium and heavy commercial vehicles (M&HCVs) (12%) and cars
(+12%). Amongst RBS coverage, market share gains by Bajaj (+566bp), Ashok Leyland
(+60bp) and Maruti (+102bp) in these respective segments helped them post better qoq
volume growth than peers. However, a low comparison base helped in high yoy growth
across segments (18-47%).
Ashok should be PAT growth (qoq and yoy) leader among our coverage
Favourable input metal prices are likely to slightly boost EBITDA margin for the industry in
2Q. However, an uptick in metal prices at end-September requires a vehicle price increase to
sustain the higher margins. Of the auto companies that we cover, we expect Ashok Leyland
to record the strongest PAT growth, both qoq and yoy, thanks to its market share gain in the
high-growth M&HCV segment and vehicle price increases, while Maruti should be able to
record a higher PAT growth from a low base in 1Q thanks to a product mix benefit. Tata
Motors consolidated entity should show strong PAT growth yoy but a dip qoq, given
unfavourable sterling.
A monsoon bonanza may be awaiting M&M and Hero Honda
Festive season demand remains buoyant despite rising interest costs, vehicle prices and fuel
prices in recent weeks, and while we think these factors could weigh on demand after
November, there may be a positive surprise from advance purchases before the anticipated
excise duty hike in the February 2011 budget. We see the uptick in oil prices as a potential
concern for the car segment, in which we see competition intensifying around January 2011.
we like Hero Honda as we believe at current attractive valuation the technology
concerns are overplayed and it is best placed to benefit from a rural demand surge. In fourwheelers,
we like M&M given its strong new product pipeline and easing of capacity
constraint that means it can benefit from rural demand. In CVs, we like Ashok Leyland, which
we view as best placed to extend the operating leverage benefit. Tata Motors is a premium
car play with a restructured balance sheet.
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