Nomura: Autos -2011 Update

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Autos
 Action
We maintain our Neutral stance on the Indian auto sector. We expect slower but
steady volume growth for FY11F. Mahindra & Mahindra is our top pick for 2011F as
the company benefits from low availability of farm labour and relatively subdued
competition. We also like Bajaj Auto, given its sound product mix and potential to
outgrow the industry.
 Catalysts
Volume growth will likely be a key catalyst for the sector.
Anchor themes
We prefer stocks centred around the consumption and rural growth themes. These
companies stand to benefit from the government’s focus on rural development and
rural job creation.

Consumers to drive the sector
 Slower but steady growth ahead
From the end of FY11F, we think the Indian auto sector will likely see two
continuous years of 20%-plus growth, even in relatively well penetrated
categories like two-wheelers. We believe the growth outlook is underpinned by:
1) government initiatives to develop the rural economy. The rural development
budget has grown from INR288bn at the end of FY08 to INR661bn at the end of
FY11F, and this has led to a sharp upswing in employment opportunities and the
number of cash-rich consumers; 2) the sharp upswing in industrial growth has
spurred a revival in the urban job outlook and salaries. It has also led to a
shortage of trucks in the system. The auto sector thus continues to benefit from
an upturn in both urban and rural growth. In FY12F, we expect the government’s
focus on inclusive growth to continue and thus we remain optimistic about
growth – especially in consumer-focused sectors such as cars (+15.5% y-y) and
two wheelers (+12%y-y). We don’t expect a big upswing in incremental IIP and
thus expect much slower growth for commercial vehicles in FY12F (+8% y-y).
 Margins to remain stable
Margins at most players are near all-time highs. We note that with all companies
operating at close to full capacity, the benefits of operating leverage may be
much less pronounced than in the past. We expect demand to remain relatively
stable and cost pressures low. Hence, we think most companies should be able
to maintain margins. In some company-specific cases, like MSIL (MSIL,
REDUCE), we expect greater cost pressures due to appreciation in the yen.
 Don’t expect changes in taxes and duties
We saw a 2% increase in excise duties in February 2010 to 10%. The
government plans to implement a goods and services tax (GST). The rate and
timeline have not been fixed, but we think the GST will most likely be
implemented from FY13F and may lower the tax on automobiles. Hence, we
don’t expect taxes to increase in FY12F either.
 We prefer stocks around the consumption theme
As a theme for 2011 we prefer stocks exposed to the consumption theme
because we expect government policies to continue to favour the consumer. In
view of the continued impact of policies regarding rural development, we have
Mahindra & Mahindra as our top pick for 2011F. We like Bajaj Auto in the two-

wheeler space. We maintain our REDUCE rating on Maruti Suzuki India Limited, as we
see cost headwinds due to yen appreciation and increasing competition.
In our view, growth in commercial vehicles will be much slower in 2011 and thus we do
not prefer it as a theme. We find that commercial vehicles now account for only 30% of
the value of Tata Motors (TTMT IN, NEUTRAL); hence, we believe the risk to the
company from the commercial vehicle cycle has declined.