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UBS Investment Research
India Auto Sector
Stress testing our growth assumptions
M&M and Maruti have lowest downside risk in a domestic slowdown
Given strong volume growth registered by auto cos. in FY10 and FY11, the recent
spike in interest rates due to tight liquidity conditions and volatile IIP trend, we try
to estimate the downside risk to current stock price of auto cos. in the case of a
sharp slowdown in FY12. Our bear case earnings assume sharp decline in FY12
volume growth estimates to the extent of 50% in passenger vehicles and 80-90% in
the case of CVs with no change in our assumptions on the cost side. M&M and
Maruti show low downside risk to current stock price with a 10% downside risk in
bear case.
Bear case valuations imply 10-30% downside risk
Ashok Leyland and Tata Motor’s bear case valuation reflects maximum downside
risk of 27-28% from the current level due to steeper cut to growth assumptions,
high operating and financial leverage. M&M, Maruti and Hero Honda come out
better with 10%-13% downside risk due to better growth assumptions, high net
cash for HH & Maruti and high contribution from subsidiary valuations for M&M.
Our bear case valuation for Bajaj Auto implies 17% downside risk.
We maintain our base case assumptions
We continue to maintain our growth forecast for our coverage cos. Our economist
expects the growth outlook to remain strong in FY12 with GDP growth of 8% and
IIP growth of 8.8%YoY.
Valuation: M&M and Ashok Leyland remain preferred picks
We maintain Buy on Ashok Leyland, M&M and Bajaj Auto at current levels. We
remain neutral on Maruti, Tata Motors and Hero Honda.
Stress testing our growth assumptions
Given, strong volume growth registered by auto cos. in FY10 and FY11, the
recent spike in interest rates due to tight liquidity conditions and volatile IIP
trend, we try to estimate the downside risk to current stock price of auto cos.
in the case of a sharp slowdown in FY12.
Our bear case earnings assume sharp decline in FY12 volume growth
estimates to the extent of 50% in passenger vehicles and 80-90% in the case
of CVs with no change in our assumptions on the cost side.
For bear case valuations – we value the stocks on FY12E EBITDA and midcycle
fwd EV/EBITDA multiple for each co.
Our analysis shows higher downside risk for MHCV players – Tata Motors
and Ashok Leyland due to steeper cut to growth outlook, higher operating
leverage leading to larger drop in margins and high financial leverage
impacting valuations.
M&M shows low downside risk due to significant contribution of
subsidiaries to valuation and low financial and operating leverage.
Maruti and Hero Honda also show low downside risk due to low operating
leverage and large net cash on balance sheet.
Bear case Valuations
In the tables below we give in detail our bear case assumption for each company,
the resultant valuation and potential downside.
Ashok Leyland bear case valuation
Rating and 12 month PT: We maintain Buy rating and price target of Rs.105.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
12% WACC. We add Rs3.40 on account of Leyland’s stake in IndusInd Bank.
Bajaj Auto bear case valuation
Rating and12 month PT: We maintain Buy rating and price target of
Rs.1,775. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers with UBS’s VCAM tool with a
WACC of 11.3%.
Hero Honda bear case valuation
Rating and 12 month PT: We maintain Neutral rating and price target of
Rs.1,950. We derive our price target from a DCF methodology, assuming a
WACC of 11.6%, intermediate growth of 5% and a long-term operating margin
of 13%.
Mahindra & Mahindra bear case valuation
Rating and 12 month PT: We maintain Buy rating and price target of Rs.910.
We derive our 12 mth-price target from a sum-of-the-parts methodology. We
value the standalone business at Rs634/share, based on an avg. 8x FY12-13E
EV/EBITDA, and its subsidiaries at Rs216/share and 70% stake in Ssangyong at
Rs 57/share rounded off to Rs 910.
Maruti bear case valuation
Rating and 12 month PT: We maintain Neutral rating and price target of
Rs.1,700. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers with UBS’s VCAM tool with a
WACC of 11.3%.
Tata Motors bear case valuation
Rating and 12 month PT: We maintain Neutral rating and price target of
Rs.1,300. We value the domestic business and subsidiaries at 10x 12-month
forward EBITDA and JLR at 5x 12-month forward EBITDA to derive our price
target.
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