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Key themes for 2011
Macro outlook: While GDP growth is likely to hold at
8.5%+, inflation is stronger than expected. Thus our J.P.
Morgan economist team expects monetary tightening to
resume as early as 1Q11 – which could impact demand
for automobiles.
Business outlook: While volume growth over CY11 is
likely to be in double digits, we believe that growth rates
will moderate to trend levels at c.14-17% (from c.20-
25% in 2009-10) given a) a demanding base effect, and
b) monthly running costs for automobiles have gone up
by c.8-10% over the year on i) rising product prices, ii)
higher fuel prices, and iii) firming up of interest rates.
How the business is expected to evolve through the
year
While volumes are likely to grow in double digits, a
demanding base effect, rising interest rates and fuel
prices could impact demand, in our view.
Competitive intensity is likely to increase for twowheelers
as Honda (post the split with Hero) will expand
its presence in the mass-market segment. Within
passenger cars, we expect global OEMs to expand their
dealership networks in tier II / III cities in addition to
launching new products.
Sector EBITDA margins likely to remain range-bound:
Margins for the sector have peaked and are likely to
remain range-bound over CY11 given a) rising
commodity prices, b) higher competitive intensity, c)
limited operating-leverage-related cost savings, and d)
royalty-related issues.
Sector / Stock recommendations
After strong growth in 2009-10, we expect growth rates
to normalize as highlighted above. Further, competitive
intensity is rising particularly in the passenger-car and
two-wheeler segments. In this backdrop, we currently
prefer companies that have a defendable niche, given that
growth rates and competitive landscape will vary going
forward.
M&M (OW) – We believe the company will benefit
from industry growth in its traditional UV and tractor
segments, given its dominant market leadership. The
company is entering into new growth segments as well –
ultra-light ton trucks /MHCV’s. The subsidiaries, which
contribute c.25% of the stock price, are likely to benefit
from the improved economic environment: Risks –
potential fund infusion required for Ssangyong.
Hero Honda (UW) – Hero Honda has been ceding
market share to Bajaj Auto over the year. Post the recent
split with Honda, the local OEM will have to defend its
market share further, given that competition from Honda
will likely intensify. Further, brand spends and expenses
on R&D are likely to increase as well – which could
weigh on margins.
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