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Indian auto sector: Cruising, but with a lighter foot on the accelerator
[Srinivas Rao]
We expect stock selection to remain the theme for 2011, as was the case in 2010.
Among the six OEM majors, we prefer Tata Motors, Mahindra & Mahindra and
Bajaj Auto. Our preference is based on business momentum, valuations and
medium-term catalysts. We believe TAMO and MAHM will likely witness revenue
momentum and are well placed to counter rising input costs. Bajaj’s stable
margins, positive guidance and attractive valuation post its recent
underperformance is the basis for our upgrade to Buy (TP Rs1,650).
Bajaj Auto Limited: Attractive valuation, positive guidance; upgrading to Buy
[Srinivas Rao]
Our upgrade is based on Bajaj's good 3QFY11 results, positive margin guidance
and attractive valuation after its recent underperformance (9% vs. Sensex in 3m).
It trades at 7.5% FY12E FCF yield and a 20% discount to Hero Honda. We believe
Bajaj’s rejuvenated brand franchise should help sustain its market share at current
level of 27% which is close to its trend level. Its stable margin performance over
the last three quarters despite rising input costs is impressive Management has
guided for a stable margin and c. 20% volume growth in FY12E.
Ashok Leyland Ltd: Approaching a mid-cycle growth phase; maintain Hold
[Srinivas Rao]
We are raising our FY11E and 12E EPS estimates by around 14% to Rs4.3 and
Rs4.9. We have increased our target price by 8% to Rs65 and maintain our Hold
recommendation. We note that Ashok Leyland’s market share gains have tapered
after reaching the long-term trend level of 27%. While production scale-up at its
tax-advantaged Uttaranchal plant would be margin accretive, we believe it would
be offset by rising competitive intensity in the domestic CV market.
Hindustan Zinc: Higher than expected earnings reinforce conviction [Anuj
Singla]
Hindustan Zinc's (HZL) 3Q'FY11 earnings came 17% above our expectations. The
variance is attributed primarily to higher than expected sale of Zinc and Lead
concentrate. The company also reported higher than expected premiums for both
Zinc and Lead metal sale, which also contributed to the earnings surprise. The
company has announced 5:1 stock split and issuance of bonus shares in the ratio
of 1:1. We are revising our FY11 and FY12 earnings by 4% and 2% respectively, in
line with the revision in DB's global commodities forecasts.
Indian Infrastructure: Caught between price and permits [Manish Saxena]
Following the emergence of worries over domestic coal availability coupled with
recent tightening of global coal markets, we are beginning to get concerned about
the resultant impact on Indian utilities and cement producers. For Indian power
utilities, peak utilisation levels could drop 2,000bps by FY14E supporting a demand
growth <6%. For cement players already grappling with excess supply, the
tightness in coal markets will likely exacerbate margin pressure.
Metals & Mining: Global pricing momentum to result in local price hikes
[Abhay Laijawala]
Pricing momentum seen in the North American markets is now spreading through
to Asia. We understand that CIS export prices have jumped by US$95/tonne to
USD720/tonne over the last fortnight. The large gap between US and CIS prices
(even following the increase) is allowing CIS country exporters to sell at elevated
prices.
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