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Auto (awaiting validation of structural demand , input cost
pressures) Neutral
The Indian automobile sector has seen strong demand across segments
resulting in 29.2% YTD volume growth. The market faces a dilemma as to
whether the industry is at an inflection point or is pent up demand getting
liberated now. Our expectation of robust volume growth in coming months,
if authenticated, would lend strong support to our assumption. The
structural demand shift could lead to a market re-rating but pressures from
higher input costs remain an overhang.
⇒ OEMs remain upbeat on the demand scenario and have plans to raise
capacity by ~40% by FY12-13, from existing ~2.8 million per annum.
We expect the base effect to kick in with industry posting volume
growth of ~17-20% YoY in FY12. Ancillary suppliers, which have been
handicapped by capacity shortages due to unexpected demand
outburst, also have additional capacity coming online in FY12. We
expect them to clock ~20-23% YoY volume growth in FY12E
⇒ The Indian automobile sector in CY10 is at a point similar to China in
2003-04. In CY04, China’s GDP per capita (PPP basis) stood at $3614
while PV sales stood at 23 lakh per annum, post which the auto sales
took off exponentially. In CY10, India’s GDP per capita is $3291 while
PV sales stand at ~21 lakh per annum. If we were to take China’s
performance as an indicator, India seems to be at an inflection point,
which could lead to a structural change in demand
⇒ While we remain positive on the volume growth in the sector, in the
near term a persistent rise in commodity prices like CRC steel (avg
~10% YoY), aluminium (avg ~12% YoY) and rubber (avg ~48% YoY)
could dampen earnings growth to ~12-15% YoY. On the demand side,
any steep increase in interest rates would defer probable sales
⇒ Historically, the BSE Auto Index has traded between 10x and 18x one
year forward and is currently trading in the mid range of 13-14x.
Though rising interest rates and raw material prices may remain an
overhang, if we witness a structural shift in demand, the sector may
get re-rated. Till then, we are neutral on the sector. The pure play PV
and two-wheeler segment could face increased competitive pressures
from international players. We expect stocks that have exposure to
infra-linked CV segments and agri-related tractor segments, like M&M,
Escorts and Tata Motors, to outperform. On the ancillary side, we
suggest a selective play on companies with diversified businesses and
higher operating leverage like Exide Industries and Bharat Forge.
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