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Recent sell-off provides stock picking opportunities; top picks – TAMO, Bajaj
Indian auto companies have underperformed a falling market (the BSE Auto Index
is down 5% vs. the Sensex) since the beginning of 2011 due to the perceived
risks of inflation, input costs and interest rates. We lay out the various scenarios
that current prices are implying in terms of margins, growth and valuations. We
conclude that Tata Motors, Bajaj and TVS’s prices discount pessimistic scenarios,
while M&M and Maruti discount moderately conceivable scenarios. Ashok Leyland
and Hero Honda could further de-rate if market sentiment weakens.
Tata Motors: current stock price implies conservative assumptions on JLR
If we value TAMO’s India-based business as 8.5x FY12E EBITDA (mid-cycle
multiple), the current stock price implies 2x FY12E EV/EBITDA for Jaguar Land
Rover (JLR). This is at a significant discount to its peers, BMW and Daimler, which
are trading at c3.5x. On the other hand, if we continue to value the domestic
business and JLR at our target multiples of 8.5x and 3.5x FY12E EBITDA, the
current price implies JLR’s FY12E volumes at 168K. This implies -33% growth, an
unlikely outcome in the environment of robust global demand for luxury cars.
Bajaj Auto: market implying significant deterioration in profitability
Bajaj has maintained margins despite input cost pressures due to improving sales
mix and regular price hikes. Management continues to guide for a 20% EBITDA
margin in FY12E while the stock price implies margins at c17% vs. our estimate of
19%. The price also implies just 6% perpetual FCF growth and a 7.5% FCF yield.
TVS: underlying improvement in margin profile being ignored by the market
TVS’s stock price factors in EBITDA margins at c5%, a fairly pessimistic scenario,
in our view. This is close to FY09 levels when the sales mix was significantly
adverse. For 9MFY11, TVS’s EBITDA margin stands at 6.4%, and we expect it to
increase to 7%/7.4% in FY12E/13E. This should be driven by higher-margin 3Ws
(8% of revenues in FY13E vs. 5% in FY11E). Our forecasts imply a monthly run
rate of 4,500 3Ws vs. the current 3,500 (and guidance at 5,000/month).
Mahindra: stability in its niches have contributed to margin resilience
Assuming 13x core FY12E P/E for the automotive business, the implied EBITDA
margin at the current stock price is 13.3%. This compares to a 16% 1HFY11
EBITDA margin. We forecast EBITDA margins of 15.3%, 14.8%, and 14.3% in
FY11E, FY12E, and FY13E, respectively. Though we expect margins to trend
downwards, we believe the decline suggested by the market is a pessimistic
outcome. For our analysis, we strip out Rs 138/share, as we value M&M’s listed
subsidiaries at their current prices after applying a 20% holdco discount.
We like TAMO, Bajaj and MAHM; recommend TVS within mid-caps
We like TAMO on its volume momentum and stable margins in JLR (65% of
EBITDA). Bajaj has attractive valuations and a 7.5% FCF yield, while MAHM has
strong volume growth (UVs 20%, tractors 12%) and resilient margins. TVS is
trading at a 30% discount to peers’ higher earnings momentum, as reflected in its
two-year EPS CAGR (FY11-13E) of 31%.
Valuation: DCF is our preferred methodology
We value most auto companies on a DCF basis. Upside/downside risks include
higher-/lower-than-forecast volume growth and lower/higher commodity prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Recent sell-off provides stock picking opportunities; top picks – TAMO, Bajaj
Indian auto companies have underperformed a falling market (the BSE Auto Index
is down 5% vs. the Sensex) since the beginning of 2011 due to the perceived
risks of inflation, input costs and interest rates. We lay out the various scenarios
that current prices are implying in terms of margins, growth and valuations. We
conclude that Tata Motors, Bajaj and TVS’s prices discount pessimistic scenarios,
while M&M and Maruti discount moderately conceivable scenarios. Ashok Leyland
and Hero Honda could further de-rate if market sentiment weakens.
Tata Motors: current stock price implies conservative assumptions on JLR
If we value TAMO’s India-based business as 8.5x FY12E EBITDA (mid-cycle
multiple), the current stock price implies 2x FY12E EV/EBITDA for Jaguar Land
Rover (JLR). This is at a significant discount to its peers, BMW and Daimler, which
are trading at c3.5x. On the other hand, if we continue to value the domestic
business and JLR at our target multiples of 8.5x and 3.5x FY12E EBITDA, the
current price implies JLR’s FY12E volumes at 168K. This implies -33% growth, an
unlikely outcome in the environment of robust global demand for luxury cars.
Bajaj Auto: market implying significant deterioration in profitability
Bajaj has maintained margins despite input cost pressures due to improving sales
mix and regular price hikes. Management continues to guide for a 20% EBITDA
margin in FY12E while the stock price implies margins at c17% vs. our estimate of
19%. The price also implies just 6% perpetual FCF growth and a 7.5% FCF yield.
TVS: underlying improvement in margin profile being ignored by the market
TVS’s stock price factors in EBITDA margins at c5%, a fairly pessimistic scenario,
in our view. This is close to FY09 levels when the sales mix was significantly
adverse. For 9MFY11, TVS’s EBITDA margin stands at 6.4%, and we expect it to
increase to 7%/7.4% in FY12E/13E. This should be driven by higher-margin 3Ws
(8% of revenues in FY13E vs. 5% in FY11E). Our forecasts imply a monthly run
rate of 4,500 3Ws vs. the current 3,500 (and guidance at 5,000/month).
Mahindra: stability in its niches have contributed to margin resilience
Assuming 13x core FY12E P/E for the automotive business, the implied EBITDA
margin at the current stock price is 13.3%. This compares to a 16% 1HFY11
EBITDA margin. We forecast EBITDA margins of 15.3%, 14.8%, and 14.3% in
FY11E, FY12E, and FY13E, respectively. Though we expect margins to trend
downwards, we believe the decline suggested by the market is a pessimistic
outcome. For our analysis, we strip out Rs 138/share, as we value M&M’s listed
subsidiaries at their current prices after applying a 20% holdco discount.
We like TAMO, Bajaj and MAHM; recommend TVS within mid-caps
We like TAMO on its volume momentum and stable margins in JLR (65% of
EBITDA). Bajaj has attractive valuations and a 7.5% FCF yield, while MAHM has
strong volume growth (UVs 20%, tractors 12%) and resilient margins. TVS is
trading at a 30% discount to peers’ higher earnings momentum, as reflected in its
two-year EPS CAGR (FY11-13E) of 31%.
Valuation: DCF is our preferred methodology
We value most auto companies on a DCF basis. Upside/downside risks include
higher-/lower-than-forecast volume growth and lower/higher commodity prices.
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