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The robust demand trend witnessed in the domestic auto industry
during 9MFY2011 (overall volumes up 29%) continued in
4QFY2011. However, as expected, the growth rate tapered off
slightly, with companies reporting yoy volume growth of
13-27%. For 4QFY2011, we expect auto companies to post
healthy net sales growth of ~22% yoy, aided largely by ~21%
yoy volume growth. Volume growth during the quarter was
supported by positive consumer sentiment coupled with
pre-Budget buying in anticipation of the likely increase in excise
duty in the Union Budget 2011-12 and higher discounts offered
by OEMs and dealers to clear their year-end inventory. Going
ahead, the focus will continue to be on volume growth as nearterm
volume growth is likely to moderate due to the high base
effect of FY2011 and increased financing cost and fuel prices;
while in the long run, we expect sales momentum to continue,
aided by healthy consumer sentiment, rising income levels, easy
availability of finance and new product launches.
EBITDA margins continue to be under pressure
For 4QFY2011, we expect operating margins of most auto
companies to continue their downward trend on account of
higher raw-material costs. Prices of major raw materials such
as steel, aluminum and rubber witnessed average increases of
~17%, ~15% and ~62% yoy, respectively, during 4QFY2011.
While realisation for auto companies is expected to improve on
account of superior sales mix and price increases, it would not
offset higher input costs completely. In addition, cost-reduction
initiatives and improved operating leverage are expected to
dilute the impact of input cost inflation to a certain extent. We
expect the operating margin for our auto universe to witness a
significant ~250bp yoy and ~70bp qoq contraction for
4QFY2011. On the net profit front, major players in our auto
universe are expected to register a ~200bp yoy decline in
profitability, leading to a decline of ~5% yoy in profits.
Interest rate, fuel price and commodity price trend
Financing plays an important role and industry trend suggests
that there is a negative correlation between auto finance rates
and auto volume growth. Auto finance rates declined by
200-250bp in FY2010, which supported robust growth during
the period. A swift revival in underlying vehicle sales volume, a
benign finance environment and an increase in finance
penetration and loan-to-value (LTV) ratio are the key factors
responsible for the industry's growth. However, monetary
tightening by the RBI has pushed interest rates up, thereby
increasing the cost of ownership for consumers. Further, the
government's policy of deregulating petrol prices to control fiscal
deficit has led to a substantial increase in petrol prices since
June 2010. Petrol and diesel prices were hiked by
`10.94/litre and `2.3/litre in FY2011, respectively. This should
have a direct impact on ownership cost and freight operators'
profitability and could moderately impact auto volume growth
in the medium term. For 4QFY2011, commodity prices in
general have witnessed an upward trend, with prices of key
raw materials, steel and aluminum, increasing by 14-18% yoy.
Rubber and lead prices also rose by ~62% and ~17% yoy,
respectively, during the quarter.
Auto index underperforms the Sensex
The auto index lost 9.2% during 4QFY2011 versus a 5.2%
decline for the Sensex, thus underperforming the Sensex by
4.0%. The underperformance was seen despite most of the auto
majors reporting healthy volume numbers during the quarter.
The sentiments were negative mainly due to increased financing
cost, fuel price hikes, rising input cost pressures and higher
product prices by manufacturers. However, the sector received
a major relief as the finance minister left the excise duty structure
unchanged in the Union Budget. Among index heavyweights,
Tata Motors and Bajaj Auto outperformed the auto index by
4.7% and 3.9%, respectively, while other heavyweights such as
Hero Honda, Exide, Maruti and M&M underperformed.
Commercial vehicles (CV)
CV sales reported strong 32.1% yoy growth from
April 2010-February 2011, supported by sustained growth in
the economy, improvement in industrial and agricultural
production and healthy freight availability. However, growth has
been relatively subdued in 4QFY2011 on account of the
relatively high base of previous year, recent price hikes and
supply constraints due to unavailability of components and tyres.
With positive traction in the GDP, which is estimated to register
a CAGR of ~8.5% over the next two years, we expect CV
demand to remain buoyant. Moreover, healthy freight rates,
easy availability of finance and government thrust on
infrastructure investment are expected to boost the growth
momentum further. As a result, we expect the CV sector to register
a CAGR of ~10% over FY2011-13E. During 4QFY2011,
Tata Motors recorded 12.5% yoy growth, mainly due to an
18.3% yoy increase in LCV volumes. Sales volumes to some
extent were impacted by the shortage in supplies of key
components – engines, fuel injection pumps and tyres.
Passenger vehicles (PV)
PV volumes registered robust 23.2% yoy growth from
April 2010-February 2011, aided by strong performance in
the domestic market. Despite concerns of increasing interest
rates, inflation and hike in product prices, domestic demand
continues to sustain, supported by positive consumer sentiment
and new model launches. Exports, however, declined by 0.9%
yoy YTD in FY2011 as PV majors continue to focus on meeting
strong demand in the domestic market. Moreover, robust volume
growth, low penetration and a low-cost manufacturing base
have been attracting global auto majors to India, who have
started launching products for the Indian market. During
CY2010, General Motors, Volkswagen, Nissan and Ford
launched Beat, Polo, Micra and Figo, respectively, in the
dominant A2 segment, thereby escalating competition for the
market leader Maruti. As a result, Maruti lost ~120bp of its
market share in the domestic A2 segment, with its current market
share at 55.7%. During 4QFY2011, Maruti registered a 19.5%
yoy increase in total volumes, driven by robust performance in
the A2 and C segments. Going ahead, we expect volume
momentum in the PV segment to continue, but at a slightly
modest pace. We estimate the PV segment to register a CAGR
of ~12% during FY2011-13E.
Two-wheeler
Healthy domestic demand and continued improvement in supply
aided the two-wheeler segment to post robust 27.7% yoy growth
from April 2010-February 2011. The dominant motorcycle
segment posted strong 25% yoy growth, while the scooters
segment reported impressive 45% growth, helped by good
demand for Activa, Wego and Pleasure. Hero Honda (HH)
posted robust 22.6% yoy growth in the domestic market in
4QFY2011, backed by the strength of its market reach and
strong performance in the rural market, while Bajaj Auto (BAL)
reported 17.2% yoy growth in motorcycle volumes, riding on
the strong performance of Pulsar and Discover. We believe
though the substantial ownership base of two-wheelers results
in reduced headroom for higher growth and increases
dependence on replacement demand to sustain volumes, rural
markets are likely to post better growth. This is expected to help
two-wheeler companies maintain their growth momentum and
register a volume CAGR of ~11% over the next couple of years.
Auto ancillaries to track the auto sector
The auto ancillaries sector, which depends on OEMs for growth,
was stuck in the midst of sluggish growth in the domestic market
and a recession-hit global export market in FY2009. However,
revival of domestic auto volumes in FY2010 supported recovery
of players during the period. Growth of the Indian auto
component industry is directly linked to the auto sector's growth
and has more than 65% of its domestic sales to OEMs. Thus,
recovery of auto sales volume is likely to help the OEM segment
to register a CAGR of 11-12% over the next two years. Further,
an overall increase in vehicle population (recorded a 10% CAGR
over FY2000-10E) is expected to support consistent growth in
replacement demand of auto parts and register a 7-8% CAGR
over FY2011-13E. The shift in focus of the Indian auto
component industry from the domestic market to exports has
been apparent from the rise in its share in the overall turnover
to 20% in FY2009 (11% in FY1999). Europe and US contribute
around 66% to the sector's export revenue. The economic
slowdown has been adversely affecting vehicle sales in these
markets in the last two years. However, with these markets now
showing signs of revival, export volumes are expected to recover
in FY2012-13E. At the end of FY2009, auto component players
were finding it difficult to make future projections, as two of
their key markets, OEM and replacement, had been hit by poor
demand and instability in final product prices, which were
trending downwards. However, the industry is now recovering
on better-than-expected revival in the domestic market and
marginal improvement in exports. Companies in the
subsegments of the auto components sector (tyres, bearings
and batteries), with larger share of revenue from replacement
and domestic markets, have been less affected than those that
supply exclusively to the overseas market. Broadly, the sector is
expected to deliver good yoy earnings performance in
4QFY2011 on improved volumes and better operating leverage.
Among battery manufacturers, we expect Exide to post modest
~9% yoy growth, as battery players continue to be affected by
the slowdown in demand in the telecom segment. Noticeably,
Exide has increased its product prices by 5-8%, effective from
February 2011. Tyre manufacturers continue to reel under the
pressure of increasing natural rubber prices, up ~62% yoy and
~18% qoq, which has affected their profitability. We expect
Apollo Tyres to report a ~453bp yoy contraction in its operating
margin, leading to a ~58% yoy decline in profit.
Outlook
Going ahead, driven by strong economic recovery, we expect
the auto sector, which includes PVs, CVs and two-wheelers, to
register good growth in the domestic market and decent growth
in the export market over FY2011-13E. We estimate overall
auto volumes to register a CAGR of 11-12% over the next couple
of years, aided by improved business environment for the sector.
Over the longer term, comparatively low penetration levels, a
healthy economic environment and favourable demographics
supported by higher per capita income levels are likely to help
auto companies in sustaining their top-line growth. Core
business performance of auto companies continues to improve,
as reflected by the substantial volume growth of 25% yoy and
27% yoy witnessed in FY2010 and YTD FY2011, respectively.
Thus, while the 4QFY2011 performance is likely to be robust
on a yoy basis, we expect auto companies to report a marginal
growth sequentially. Most stocks have been positive in the last
one year due to better visibility for the sector. We remain positive
on the long-term prospects of the Indian auto sector. We prefer
stocks with attractive valuations and where strong fundamentals
could deliver positive earnings surprises.
Among auto heavyweights, we prefer Maruti, Tata Motors and
M&M. In the auto ancillary space, we maintain our positive
stance on FAG Bearings and Amara Raja Batteries, as they are
available at reasonable valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The robust demand trend witnessed in the domestic auto industry
during 9MFY2011 (overall volumes up 29%) continued in
4QFY2011. However, as expected, the growth rate tapered off
slightly, with companies reporting yoy volume growth of
13-27%. For 4QFY2011, we expect auto companies to post
healthy net sales growth of ~22% yoy, aided largely by ~21%
yoy volume growth. Volume growth during the quarter was
supported by positive consumer sentiment coupled with
pre-Budget buying in anticipation of the likely increase in excise
duty in the Union Budget 2011-12 and higher discounts offered
by OEMs and dealers to clear their year-end inventory. Going
ahead, the focus will continue to be on volume growth as nearterm
volume growth is likely to moderate due to the high base
effect of FY2011 and increased financing cost and fuel prices;
while in the long run, we expect sales momentum to continue,
aided by healthy consumer sentiment, rising income levels, easy
availability of finance and new product launches.
EBITDA margins continue to be under pressure
For 4QFY2011, we expect operating margins of most auto
companies to continue their downward trend on account of
higher raw-material costs. Prices of major raw materials such
as steel, aluminum and rubber witnessed average increases of
~17%, ~15% and ~62% yoy, respectively, during 4QFY2011.
While realisation for auto companies is expected to improve on
account of superior sales mix and price increases, it would not
offset higher input costs completely. In addition, cost-reduction
initiatives and improved operating leverage are expected to
dilute the impact of input cost inflation to a certain extent. We
expect the operating margin for our auto universe to witness a
significant ~250bp yoy and ~70bp qoq contraction for
4QFY2011. On the net profit front, major players in our auto
universe are expected to register a ~200bp yoy decline in
profitability, leading to a decline of ~5% yoy in profits.
Interest rate, fuel price and commodity price trend
Financing plays an important role and industry trend suggests
that there is a negative correlation between auto finance rates
and auto volume growth. Auto finance rates declined by
200-250bp in FY2010, which supported robust growth during
the period. A swift revival in underlying vehicle sales volume, a
benign finance environment and an increase in finance
penetration and loan-to-value (LTV) ratio are the key factors
responsible for the industry's growth. However, monetary
tightening by the RBI has pushed interest rates up, thereby
increasing the cost of ownership for consumers. Further, the
government's policy of deregulating petrol prices to control fiscal
deficit has led to a substantial increase in petrol prices since
June 2010. Petrol and diesel prices were hiked by
`10.94/litre and `2.3/litre in FY2011, respectively. This should
have a direct impact on ownership cost and freight operators'
profitability and could moderately impact auto volume growth
in the medium term. For 4QFY2011, commodity prices in
general have witnessed an upward trend, with prices of key
raw materials, steel and aluminum, increasing by 14-18% yoy.
Rubber and lead prices also rose by ~62% and ~17% yoy,
respectively, during the quarter.
Auto index underperforms the Sensex
The auto index lost 9.2% during 4QFY2011 versus a 5.2%
decline for the Sensex, thus underperforming the Sensex by
4.0%. The underperformance was seen despite most of the auto
majors reporting healthy volume numbers during the quarter.
The sentiments were negative mainly due to increased financing
cost, fuel price hikes, rising input cost pressures and higher
product prices by manufacturers. However, the sector received
a major relief as the finance minister left the excise duty structure
unchanged in the Union Budget. Among index heavyweights,
Tata Motors and Bajaj Auto outperformed the auto index by
4.7% and 3.9%, respectively, while other heavyweights such as
Hero Honda, Exide, Maruti and M&M underperformed.
Commercial vehicles (CV)
CV sales reported strong 32.1% yoy growth from
April 2010-February 2011, supported by sustained growth in
the economy, improvement in industrial and agricultural
production and healthy freight availability. However, growth has
been relatively subdued in 4QFY2011 on account of the
relatively high base of previous year, recent price hikes and
supply constraints due to unavailability of components and tyres.
With positive traction in the GDP, which is estimated to register
a CAGR of ~8.5% over the next two years, we expect CV
demand to remain buoyant. Moreover, healthy freight rates,
easy availability of finance and government thrust on
infrastructure investment are expected to boost the growth
momentum further. As a result, we expect the CV sector to register
a CAGR of ~10% over FY2011-13E. During 4QFY2011,
Tata Motors recorded 12.5% yoy growth, mainly due to an
18.3% yoy increase in LCV volumes. Sales volumes to some
extent were impacted by the shortage in supplies of key
components – engines, fuel injection pumps and tyres.
Passenger vehicles (PV)
PV volumes registered robust 23.2% yoy growth from
April 2010-February 2011, aided by strong performance in
the domestic market. Despite concerns of increasing interest
rates, inflation and hike in product prices, domestic demand
continues to sustain, supported by positive consumer sentiment
and new model launches. Exports, however, declined by 0.9%
yoy YTD in FY2011 as PV majors continue to focus on meeting
strong demand in the domestic market. Moreover, robust volume
growth, low penetration and a low-cost manufacturing base
have been attracting global auto majors to India, who have
started launching products for the Indian market. During
CY2010, General Motors, Volkswagen, Nissan and Ford
launched Beat, Polo, Micra and Figo, respectively, in the
dominant A2 segment, thereby escalating competition for the
market leader Maruti. As a result, Maruti lost ~120bp of its
market share in the domestic A2 segment, with its current market
share at 55.7%. During 4QFY2011, Maruti registered a 19.5%
yoy increase in total volumes, driven by robust performance in
the A2 and C segments. Going ahead, we expect volume
momentum in the PV segment to continue, but at a slightly
modest pace. We estimate the PV segment to register a CAGR
of ~12% during FY2011-13E.
Two-wheeler
Healthy domestic demand and continued improvement in supply
aided the two-wheeler segment to post robust 27.7% yoy growth
from April 2010-February 2011. The dominant motorcycle
segment posted strong 25% yoy growth, while the scooters
segment reported impressive 45% growth, helped by good
demand for Activa, Wego and Pleasure. Hero Honda (HH)
posted robust 22.6% yoy growth in the domestic market in
4QFY2011, backed by the strength of its market reach and
strong performance in the rural market, while Bajaj Auto (BAL)
reported 17.2% yoy growth in motorcycle volumes, riding on
the strong performance of Pulsar and Discover. We believe
though the substantial ownership base of two-wheelers results
in reduced headroom for higher growth and increases
dependence on replacement demand to sustain volumes, rural
markets are likely to post better growth. This is expected to help
two-wheeler companies maintain their growth momentum and
register a volume CAGR of ~11% over the next couple of years.
Auto ancillaries to track the auto sector
The auto ancillaries sector, which depends on OEMs for growth,
was stuck in the midst of sluggish growth in the domestic market
and a recession-hit global export market in FY2009. However,
revival of domestic auto volumes in FY2010 supported recovery
of players during the period. Growth of the Indian auto
component industry is directly linked to the auto sector's growth
and has more than 65% of its domestic sales to OEMs. Thus,
recovery of auto sales volume is likely to help the OEM segment
to register a CAGR of 11-12% over the next two years. Further,
an overall increase in vehicle population (recorded a 10% CAGR
over FY2000-10E) is expected to support consistent growth in
replacement demand of auto parts and register a 7-8% CAGR
over FY2011-13E. The shift in focus of the Indian auto
component industry from the domestic market to exports has
been apparent from the rise in its share in the overall turnover
to 20% in FY2009 (11% in FY1999). Europe and US contribute
around 66% to the sector's export revenue. The economic
slowdown has been adversely affecting vehicle sales in these
markets in the last two years. However, with these markets now
showing signs of revival, export volumes are expected to recover
in FY2012-13E. At the end of FY2009, auto component players
were finding it difficult to make future projections, as two of
their key markets, OEM and replacement, had been hit by poor
demand and instability in final product prices, which were
trending downwards. However, the industry is now recovering
on better-than-expected revival in the domestic market and
marginal improvement in exports. Companies in the
subsegments of the auto components sector (tyres, bearings
and batteries), with larger share of revenue from replacement
and domestic markets, have been less affected than those that
supply exclusively to the overseas market. Broadly, the sector is
expected to deliver good yoy earnings performance in
4QFY2011 on improved volumes and better operating leverage.
Among battery manufacturers, we expect Exide to post modest
~9% yoy growth, as battery players continue to be affected by
the slowdown in demand in the telecom segment. Noticeably,
Exide has increased its product prices by 5-8%, effective from
February 2011. Tyre manufacturers continue to reel under the
pressure of increasing natural rubber prices, up ~62% yoy and
~18% qoq, which has affected their profitability. We expect
Apollo Tyres to report a ~453bp yoy contraction in its operating
margin, leading to a ~58% yoy decline in profit.
Outlook
Going ahead, driven by strong economic recovery, we expect
the auto sector, which includes PVs, CVs and two-wheelers, to
register good growth in the domestic market and decent growth
in the export market over FY2011-13E. We estimate overall
auto volumes to register a CAGR of 11-12% over the next couple
of years, aided by improved business environment for the sector.
Over the longer term, comparatively low penetration levels, a
healthy economic environment and favourable demographics
supported by higher per capita income levels are likely to help
auto companies in sustaining their top-line growth. Core
business performance of auto companies continues to improve,
as reflected by the substantial volume growth of 25% yoy and
27% yoy witnessed in FY2010 and YTD FY2011, respectively.
Thus, while the 4QFY2011 performance is likely to be robust
on a yoy basis, we expect auto companies to report a marginal
growth sequentially. Most stocks have been positive in the last
one year due to better visibility for the sector. We remain positive
on the long-term prospects of the Indian auto sector. We prefer
stocks with attractive valuations and where strong fundamentals
could deliver positive earnings surprises.
Among auto heavyweights, we prefer Maruti, Tata Motors and
M&M. In the auto ancillary space, we maintain our positive
stance on FAG Bearings and Amara Raja Batteries, as they are
available at reasonable valuations.
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