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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India auto sector
Ease off the throttle
Recent stock corrections offer stock-picking opportunities
We are cautious on Indian auto sector growth after our recent interactions with
company managements (both listed and unlisted) and our channel checks with
auto dealers and auto financiers. As we see it, auto sales growth is likely to slow
from the high rates seen over the last two years; however, the growth should still
remain healthy. We prefer stocks that have lower risk to margins and thus offer
better visibility on earnings growth. We prefer M&M, Tata Motors and Bajaj Auto
and reaffirm our contrarian Underperform rating on Maruti Suzuki and Hero Honda.
Volume growth to slow, but still remain healthy
We expect auto sales volume growth to slow to 16% from the very high pace
(26% CAGR) of the last two years. Growth rates across segments may be
affected by increases in the cost of ownership due to a rise in lending rates (we
expect a further 75bp hike in FY12), fuel price hikes due to soaring crude oil
prices and price increases taken by the OEMs to pass-on raw material inflation.
In FY12, we expect CV sales to grow by 10% (down from 27% in FY11), two
wheelers by 16% (26% in FY11) and passenger vehicles by 19% (29% in FY11).
Rising costs and competitive pricing to hurt margins
Prices of key raw materials have been increasing (steel +28%, aluminium +23%
and rubber +85% in FY11), and we expect this uptrend to continue in FY12. As
the higher-priced new supply contracts have started in April 2011, we expect
pressure to increase. Margin contraction is more likely to affect OEMs operating
in the price sensitive economic segments (MSIL and HH). Further, the extent of
margin contraction will likely depend on competitive intensity.
Competitive intensity is highest in the car segment, where all the global majors are
vying for market share. Our interactions with the new entrants (like VW and GM)
suggest that they will be very competitive in trying to attain their market-share
targets. In two-wheelers, we expect the competition to increase now that Honda
has ended the JV with Hero. Competition in CVs is rising, but is still low.
Companies with margin resilience likely to outperform
Mahindra & Mahindra: We like M&M for its leadership position in key segments
that provides resilience to its margins. Strong volume growth in UVs (14%) and
tractors (12%) may drive 15% EPS growth. Auto business is trading at 11x PER.
Tata Motors: We like TTMT for its JLR business, which contributes 80% to
profits. We expect JLR to maintain growth momentum and margins in FY12. The
current stock price implies an EV/EBITDA of 3.5x for JLR, which is 15% lower
than those of its peers.
Bajaj Auto is more favourably placed than Hero Honda in the two wheeler
space, in our view. Bajaj has multiple drivers of growth, and this makes its
margins and growth much more resilient. Conversely, HH is vulnerable as 75%
of its volume comes from a price sensitive segment. We see headwinds to HH’s
margins because of product development and branding spending post the JV
split with Hero.
Maruti Suzuki: We believe rising competition will result in muted profit growth.
Our EPS estimate for FY12 is 4% lower than the consensus. Given the current
valuation of 14x FY12E PER, we think risk-reward remains unfavourable.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India auto sector
Ease off the throttle
Recent stock corrections offer stock-picking opportunities
We are cautious on Indian auto sector growth after our recent interactions with
company managements (both listed and unlisted) and our channel checks with
auto dealers and auto financiers. As we see it, auto sales growth is likely to slow
from the high rates seen over the last two years; however, the growth should still
remain healthy. We prefer stocks that have lower risk to margins and thus offer
better visibility on earnings growth. We prefer M&M, Tata Motors and Bajaj Auto
and reaffirm our contrarian Underperform rating on Maruti Suzuki and Hero Honda.
Volume growth to slow, but still remain healthy
We expect auto sales volume growth to slow to 16% from the very high pace
(26% CAGR) of the last two years. Growth rates across segments may be
affected by increases in the cost of ownership due to a rise in lending rates (we
expect a further 75bp hike in FY12), fuel price hikes due to soaring crude oil
prices and price increases taken by the OEMs to pass-on raw material inflation.
In FY12, we expect CV sales to grow by 10% (down from 27% in FY11), two
wheelers by 16% (26% in FY11) and passenger vehicles by 19% (29% in FY11).
Rising costs and competitive pricing to hurt margins
Prices of key raw materials have been increasing (steel +28%, aluminium +23%
and rubber +85% in FY11), and we expect this uptrend to continue in FY12. As
the higher-priced new supply contracts have started in April 2011, we expect
pressure to increase. Margin contraction is more likely to affect OEMs operating
in the price sensitive economic segments (MSIL and HH). Further, the extent of
margin contraction will likely depend on competitive intensity.
Competitive intensity is highest in the car segment, where all the global majors are
vying for market share. Our interactions with the new entrants (like VW and GM)
suggest that they will be very competitive in trying to attain their market-share
targets. In two-wheelers, we expect the competition to increase now that Honda
has ended the JV with Hero. Competition in CVs is rising, but is still low.
Companies with margin resilience likely to outperform
Mahindra & Mahindra: We like M&M for its leadership position in key segments
that provides resilience to its margins. Strong volume growth in UVs (14%) and
tractors (12%) may drive 15% EPS growth. Auto business is trading at 11x PER.
Tata Motors: We like TTMT for its JLR business, which contributes 80% to
profits. We expect JLR to maintain growth momentum and margins in FY12. The
current stock price implies an EV/EBITDA of 3.5x for JLR, which is 15% lower
than those of its peers.
Bajaj Auto is more favourably placed than Hero Honda in the two wheeler
space, in our view. Bajaj has multiple drivers of growth, and this makes its
margins and growth much more resilient. Conversely, HH is vulnerable as 75%
of its volume comes from a price sensitive segment. We see headwinds to HH’s
margins because of product development and branding spending post the JV
split with Hero.
Maruti Suzuki: We believe rising competition will result in muted profit growth.
Our EPS estimate for FY12 is 4% lower than the consensus. Given the current
valuation of 14x FY12E PER, we think risk-reward remains unfavourable.
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