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AUTOMOBILES Growth rate to moderate: Q3FY11 Result Preview: Edelweiss
Key highlights of the sector during the quarter
Demand remained robust during the festival season with two wheeler and car
segments registering double digit sequential volume growth. The exception was
the commercial vehicle space, where volumes declined on account of pre-buying
in the previous quarter on account of a change in emission norms.
In the two wheeler space, Hero Honda (HH) registered 11% Q-o-Q growth,
whereas Bajaj’s (BAL) sequential growth declined 5% enabling HH to stem the
losing market share. Maruti (MSIL) was able to compete stiffly against newer
launches and increase market share in the compact segment. Mahindra &
Mahindra’s (M&M) tractor volumes jumped 29% Q-o-Q and the company
maintained its dominant position.
On the corporate action front, formally Hero Group agreed to buy out Honda’s
26% stake in Hero Honda, thereby increasing its controlling stake to 52%. M&M
signed a definitive agreement to acquire 70% stake in Ssangyong for USD 463
mn.
Result expectations for the sector and stocks under coverage
Q-o-Q, we expect EBITDA margins to remain steady as operating leverage
benefits are offset by rising commodity costs. PAT for the sector is expected to
grow 13% Y-o-Y and decline 3% Q-o-Q. On the company front, HH’s and Exide’s
sequential margins are likely to improve over 50bps. At the PAT level, HH is likely
to post highest growth in sequential profit by 14% primarily on volume growth.
On the negative side, Ashok Leyland’s profit is likely to dip 60% Q-o-Q due to
lower M&HCV volumes during the quarter.
Outlook over the next 12 months
In CY11, there are some macro headwinds (higher interest rates and crude oil
prices). These factors coupled with a high base could lead to volume growth
tapering off to mid teens (from over < 25% currently). Barring the small car and
LCV segments, the competitive scenario continues to remain benign which
indicates that EBITDA margins could sustain at high levels. Going into FY12, we
would get selective in our sector pickings.
Recommendations
Top picks: Mahindra & Mahindra, Tata Motors, Ashok Leyland, Escorts.
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