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• Volume growth has sustained well across segments ‐ 24% in Two Wheelers & Passenger Car sales and 17% in CVs. Our
channel checks continue to suggest this trend persisting in Q4 as well, and in some cases even picking up pace
• Our third quarter estimates for our universe of six companies project a topline growth of 20% and operating profit
growth of 16%. The net earnings swing at the stock level is the highest for Tata Motors led by operating leverage from
Jaguar
• Our key concerns continue to build around raw material led inflation. Our house estimates project uptick in steel prices
during Q4, and continuing to stay strong on supportive global environment and rising input cost for steel
manufacturers. Similarly, unfavorable weather conditions in rubber producing areas have helped rubber prices to
continue to rule at their peak levels even as import duty on natural rubber was reduced from 20% to 7.5%
• Our channel checks have not suggested significant adverse impact of interest rate hikes and price upticks so far.
However, we expect RBI to come back to tightening mode with the January 2011 policy, and likely continue till April
2011. The extent of these hikes, in case it turns out to be higher than consensus at 50‐75 bps, shall be a key basis for us
to review our FY2012 volume assumptions which are currently in mid teens for CVs
• We expect nominal price hikes from auto manufacturers during Q4 essentially as a pass through for higher input costs.
Rather we would utilize that as our key argument to continue to maintain our positive view on the sector. While it may
impact near term volumes, we do not believe it will have a material impact on our FY2012 volume estimates. Notably, auto companies took a price hike in Oct 2010 to safeguard their margins and volumes continued to sustain
Autos – Top Picks
Ashok Leyland
• The company has guided for volumes of 90,000 units (at lower end) for FY2011. Our channel checks and interaction
with the management suggest a strong likelihood of this guidance being met. We draw higher confidence on this from
our interactions with dealers in Karnataka, Tamil Naidu and Andhra Pradesh – these constitute the key markets for
Ashok Leyland. On an average, the dealers are expecting a 10% y‐o‐y growth in sales volumes in the last quarter – this
shall imply sales of over 28000 units. The Apr‐Nov unit sales stand at 55000, thereby leaving a gap of 6400 odd to be
made in Dec 2010. We believe this shall be easily met
• We have therefore upgraded our volume estimates to bring them in line with company guidance –it may be notable
here that our implied growth for Q4 volumes continues to be soft at 3%. Based on our estimates, the stock is currently
trading at 10xFY12E earnings versus its historic average of 13x. Given the recent correction in the stock price, we
upgrade our rating on the stock from Accumulate to Buy, while maintaining our target price of Rs. 82 (13x FY12E EPS)
implying EV/EBIDTA multiple of 9.5. Our key concern centers around raw material prices going up last few months
• We remain positive on the volume growth – our FY12 assumptions are based on 22% volume growth which we believe
is achievable driven by strong domestic and export demand
• Though we have estimated a dip of 125‐150 bps in FY12 margins, we believe Bajaj Auto will continue to maintain higher
than industry margins given the product profile and the market mix that it operates with. We value the stock at 17x its
FY12E earnings to arrive at our price target of Rs. 1752 implying EV/EBIDTA of 11x
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