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Sector overview
The automobile sector witnessed one of its best quarters in 3QFY11, with demand continuing
to outpace supply for most OEMs. While October and November were strong on account of
the festive demand, December volumes were driven by discounts on 2010-registered vehicles
coupled with pre-buying before the price hikes in January.
On the margins front, higher commodity costs coupled with the costs involved in the emission
norm changes will keep margins under pressure. While most OEMs have undertaken price
hikes, the benefit of the same will accrue only in the next quarter. The silver lining is that most
OEMs are running at optimum capacity, hence the operating leverage is extremely high,
which would help mitigate some of these margin pressures.
In case of MHCVs, production levels were sequentially lower post the changes in emission
norms outside the top 13 cities. In light of the demand uncertainty of BS3 trucks, most OEMs
had built up substantial BS2 inventory before the emission norm deadline. Hence, dispatches
were not lower in the same proportion.
The ancillaries continue to benefit from the overall buoyancy in the industry, oblivious to the
competitive intensity in most segments. We prefer the market leaders in this space (Exide
and Bosch) on the back of strong pricing power that they enjoy. There is also a scope of
margin expansion for these companies, as penetration into the lucrative after-markets
increases.
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