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India Autos
March 2011 Sales: Overall Healthy Volume Growth
2Wheelers (HH+TVS): Healthy sales growth at 25% YoY — 2Wheeler majors
reported strong March sales volume growth of 25% YoY (9% MoM). Motorcycles
(TVS+HH) volume rose a strong 24%, indicating a strong demand scenario. With
Bajaj launching the new Discover 125 on 31 March, we expect a marginal uptick in
April sales volumes for BJAUT. However, in the absence of details regarding Bajaj
Auto's sales figures, we are uncertain of market share.
Maruti Suzuki: domestic sales vols rise c39% YoY — Overall volume growth of 28%
YoY reflects a continued deterioration in exports (down 26% YoY). Per mgmt, one of the
plants at Manesar has started production in March, partly reflected in the March
dispatches. Discounts continue to be high on the Alto (cRs 22,000). Overall a FY11
sales figure of ~1.27mn is marginally lower (~1.7%) than our FY11 estimates. With
Hyundai reporting a flat March sales growth and Tata Motors' Indica reporting declining
volumes, we expect market share gains for MSIL.
Tata Motors: Modest March sales growth at 11% YoY — Domestic CV sales rose a
sedate 15% YoY, mainly reflecting a strong base of 4QFY10. CV demand seems to be
robust, in line with our forecast. However, Passenger Vehicles continue to disappoint in
March with a flat YoY growth (down 13% MoM). The Nano was a positive surprise with
a second consecutive month of positive volume growth (+85% YoY, +5% MoM).
However, Indica sales declined 40% YoY (-31% MoM) and TTMT seems to be the
biggest market-share loser in the A2 segment, which is expected to have the maximum
competitive intensity in FY12.
M&M: Healthy volume growth of 20% — Tractor sales volume rose a healthy 23%
YoY (+4% MoM), compensating for a more sedate 14% growth in passenger UV
volumes (strong FY10 base). 3W sales also rose a strong 32% YoY. We expect M&M's
FY12 sales to be robust on the back of a strong product pipeline and a slew of govt
incentives to the rural sector. The company's new tractor plant (annual capacity of
~100k, production to start in 2012) being set-up in Andhra Pradesh indicates that mgmt
expects strong demand growth in the sector. With a healthy volume growth trajectory,
M&M remains our top pick in the auto sector.
New model launches — 1) Bajaj Auto launched the new Discover 125cc, priced a Rs
45,500 (ex showroom Delhi). 2) Ashok Leyland-Nissan Joint Venture introduced its
first vehicle, 'Dost', a 55hp LCV. 3) Tata Motors launched new diesel and petrol
variants of Indica, called Indica eV2, priced between Rs 295,000 – Rs 395,000 (exshowroom,
Delhi). 4) Volkswagen launched the New Passat priced at Rs 2.08mn-Rs
2.57mn (ex-showroom Delhi).5) Hyundai Motors India launched the New Accent at
Rs 501,000(ex-showroom, Delhi)
March 2011: Healthy sales volume growth
Hero Honda: Hero Honda reported a very strong sales growth of 24% YoY. The
company had increased ad-spend during the Cricket World Cup. Per press reports
(Source: Economic Times, 17 March 2011), the company has set aside Rs 1bn for
promotional activities related to the new corporate identity (logo, branding etc) post
its split from Honda Motors.
TVS Motor: TVS Motor continued its strong sales growth trend with 27% YoY
growth for 2Wheelers (+24% for motorcycles). Scooter volumes at 42,655 rose a
healthy 50% YoY, partly reflecting a weak base of FY10.
TVS 3-wheelers also reported ~80% volume growth YoY, again on a weak FY10
base. We expect April-May 3W sales growth to be healthy for TVS Motor before the
base effect starts abating from June onwards.
Maruti Suzuki: Healthy domestic March sales volume
growth of 39%
Maruti's March domestic sales growth was a robust 39%, driven by the A2 segment,
which rose a strong 43% YoY. We expect Maruti's market share in this segment to
grow in March due to 1) Tata Motors' Indica volumes declining~40%YoY; 2)
Hyundai India's domestic sales rose a marginal 1%YoY; 3) General Motors India
reported production loss due to a worker's strike at its Halol plant (Source: Business
Standard 30 March 2011); and 4) Ford reported a sedate 11% YoY volume growth
(Source: Economic Times 1April 2011). However, the company continued offering
heavy discounts on the Alto, which may impact 4Q margins.
The A3 segment also rose a strong 33% YoY. While we do not have model sales,
we believe that the new SX4 diesel, introduced in Feb, partly aided in volume
growth in this segment.
The C segment (Omni+Eeco) continued its strong growth momentum with a ~33%
YoY volume growth.
Exports continued to disappoint with a 26% YoY decline in volumes, exacerbated by
the decline in demand in Middle East and Egypt. Mgmt attributed 6% decline in
FY11 export volumes to the end of scrappage incentive scheme in Europe.
According to the company’s press release, the EU accounted for 43% of export
volumes in FY11 as compared to 77% in FY10
Tata Motors: CV sales growth of 15% reflects strong base;
Passenger Vehicles sales volume disappoint
Tata Motors’ overall sales volumes in March rose a moderate 11%, mainly reflecting
a strong base of 4QFY10. CV sales growth was a healthy 15%, in line with our
expectations. Tata Motors' CV volumes suggest no impact from either the interest
rate hikes or price increases undertaken by the company in January.
However, passenger vehicles, especially the Indica, continue to be Tata Motors'
Achilles Heel. Despite launching a new variant of the Indica, called the Indica eV2,
the model's sales volumes declined c40% YoY (-31% MoM). With competitive
intensity not showing any signs of abatement, we are skeptical of Indica sales
volumes in the near term. Indigo sales also declined 5% YoY (down 20%MoM),
partly indicating the Manza effect wearing off. Nano volumes were a positive
surprise, rising 5% MoM (+85% YoY). The company also announced a price hike on
its passenger vehicles w.e.f. 1 April 2011, in order to counter input cost pressures.
Under the revised price, the Indica will be costlier by Rs 7,000-Rs 9,000, Vista and
Indigo CS by Rs 8,000-Rs 11,000 and Manza by Rs 10,000-Rs 15,000. The price of
Nano will, however, not be revised.
In the utility vehicles segment, depending upon the model, Sumo prices will go up
by Rs 13,000-Rs 15,000, Grande by Rs 16,000- Rs 19,000, Safari by Rs 18,000-Rs
29,000, Aria by Rs 30,000- Rs 36,000 and Venture by Rs 9,000-Rs 12,000.
M&M: Healthy sales volume growth of 20%
M&M's overall sales volumes rose ~20% YoY in March. Passenger UV sales rose a
modest 14%, reflecting a strong base. 3Ws continued to show healthy volume
growth momentum, rising 32% YoY. Tractor sales volume growth was a healthy
23%YoY. The company also announced the setting up of its new tractor plant in
Zaheerabad, Andhra Pradesh. With a total capacity of 100,000 tractors per annum,
the new plant will add nearly 50% to the existing tractor capacity. This indicates that
the mgmt is positive on the demand scenario for farm equipment in India. We
expect the growth trajectory to continue showing a positive trend, buoyed by fiscal
incentives granted to the rural sector by the government.
In the UV segment, in addition to the premium SUV and other variants on existing
Xylo platform, M&M will has announced that it will also launch two of Ssangyong's
SUVs, the Korando and Rexton, in India (Source: Economic Times, 1 April 2011).
We remain positive on M&M's growth prospects in UV and tractor segments, and
retain our top-pick status for the stock.
Bajaj Auto
(BAJA.BO; Rs1,459.50; 3L)
Valuation
Our target price of Rs1,390 is based on 13x June12E earnings. This is in line with
Bajaj's historical valuations. We forecast a healthy ~23% CAGR in earnings over
FY10-FY13E, but a relatively placid ~13% CAGR over FY11-13E (given strong EPS
growth of 44% Y/Y in FY11E). Historically, BJAUT's core auto business has traded
at a c20% discount to HROH, reflecting its weaker positioning within the domestic
motorcycle industry. The stock is now trading at par with Hero Honda as the latter
has de-rated, post Honda's exit from the JV. We have also de-rated Hero Honda to
bring it in line with Bajaj Auto, as HH's strengths and dominant market position will
be mitigated by the execution risks attendant with developing its own R&D, and also
its own branding.
Risks
We rate Bajaj Auto Low Risk, in line with the rating assigned by our quantitative risk
rating system, which tracks 260-day historical share price volatility. Factors
supporting our Low Risk rating are: a) healthy RoEs and strong free cash flows, and
b) lower capital intensity of the 2-wheeler business. Upside risks to our target price
include better than expected EBITDA margins, a better product mix, lower input
costs, and less competitive intensity.
Hero Honda
(HROH.BO; Rs1,602.65; 3L)
Valuation
Our target price of Rs1,443 is based on 13x June12E earnings. The multiple is at a
slight discount to the stock's long term historical average of ~13.7x, due to the
uncertainties regarding HH's market positioning, as well as R&D and brand related
issues, post its split with Honda. We have chosen to use the P/E valuation metric to
value Hero Honda, given the company's high level of cash generation, reflecting its
strong balance sheet (around Rs 53bn in cash and liquid investments).
Risks
We rate Hero Honda Low Risk according to our quantitative risk rating system,
which tracks 260-day historical share price volatility. The key downside risks that
could impede the stock from reaching our target price are: 1) Slower-than-forecast
growth in the two-wheeler industry, 2) Any substantial increase in interest rates and
greater than forecast increase in material costs; and 3) Greater than expected
increase in the competitive intensity. Upside risks to our target price include: 1)
Lower than expected market share losses, 2) Better margins, 3) Change in
corporate structure (technical collaboration, etc).
Mahindra & Mahindra
(MAHM.BO; Rs710.10; 1L)
Valuation
Our target price of Rs771 is based on a sum-of-parts methodology. We value
M&M's core business at Rs636/share (10.5x June2012E core CEPS, at a slight
discount to the historical average multiple). We also incorporate value for M&M's
listed subsidiaries (Rs135/share). Our subsidiary valuations are based on a 25%
discount to market prices of the listed subsidiaries. We have chosen P/CEPS to
value the core business to facilitate comparison with historical trading bands; the
company is undertaking a significant product development and capital expenditure
program, and also undertook a restructuring of the balance sheet in FY02. We
believe valuations will also be supported by M&M's listed subsidiaries.
Risks
We rate M&M shares Low Risk, in line with our quantitative risk rating system which
tracks 260-day historical share price volatility, and also reflecting a decline in capex
intensity, and improved business fundamentals have reduced earnings volatility. Key
risk factors to our investment thesis which could prevent the shares from reaching
our target price include: a) Any substantial rise in interest rates that could curb
demand for farm equipment and utility vehicles, b) Increase in raw material costs,
esp Steel and Rubber may put downward pressure on margins. c)Given M&M's
strong dependence on the rural economy (a substantial part of the demand for their
products emanates herein), any weak trend in the prices of agricultural commodities
could also impact demand and sales, d) Escalating competition within the UV
segment, which might lead to an increase in discounts and result in margin
pressure.
Maruti Suzuki India
(MRTI.BO; Rs1,274.35; 2L)
Valuation
Our target price for Maruti of Rs1,395 is based on Sum-of-Parts methodology. We
value the parent business at Rs1,318 based on 10x March FY12E cash earnings
(CEPS = PAT + depreciation). At 10x (earlier 11.5x) we value the parent business at
par with its historical average. We have cut it from 11.5x to 10x to reflect escalating
competitive pressures, commodity cost pressure, foreign currency exposure and our
concerns on the changing contours of the relationship between Suzuki Motors and
Maruti Suzuki. We value MSIL's subsidiaries at Rs77/share, based on 14x March
FY12E EPS. We estimate cash earnings CAGR of ~10% over FY10-FY13E, which
reflects a 6%YoY dip in FY11 before 21% and 15% upticks in FY12 and FY13
respectively. On our target multiple, Maruti would trade at FY12 E P/E (including
subsidiary earnings) of around 14.6 x (slightly lower than the broad market at ~16x).
We prefer price/cash earnings as a valuation metric for the automobile sector, given
the industry's high capital intensity (both in terms of capacity and product
development). Moreover, MSIL's depreciation policy is per IFRS standards, and is
thus more aggressive than those of peers.
Risks
We rate Maruti Low Risk. This is in line with the Low Risk suggested by our
quantitative risk-rating system, which tracks 260-day historical share price volatility,
and we believe warranted by improving macro trends for the auto sector, in our
view. Upside risks that could prevent the stock from reaching our target price
include: 1) greater than forecast increase in volumes and realizations; and 2)
decline in competitive intensity. Downside risks include: 1) sales of passenger
vehicles are sensitive to economic variables with an appreciable rise in interest
rates potentially hitting volume growth across the auto sector; 2) higher than
forecast increase in commodity costs; 3) competitive pressures in the Indian market
continue to increase, which could impact margins over the longer term; 4)
unfavorable foreign currency rates
Tata Motors
(TAMO.BO; Rs1,242.90; 1M)
Valuation
Our Rs1,533 target price for Tata Motors is based on a sum-of-the-parts valuation.
We value Tata Motors' core business at Rs773/share (on a share count of 611m
shares), based on 8.5x Mar12E EV/EBITDA (rolled forward from Dec11). We value
subsidiaries and investments at Rs91/share. We attribute around Rs670/share to
JLR - we value this at 4x Mar12E EV/EBITDA, which equates to around
Rs808/share and then deduct the total net debt which amounts to around
Rs138/share. At our target price, TTMT would trade at a consolidated price-to-book
value of 4.8x / 3.1x (FY11/12E), which appears reasonable when juxtaposed
against ROEs of 45%, 38% in FY11E/12E respectively. On a P/E basis, the stock
would trade at ~10.6x and 8.2x FY11E/12E EPS.
Risks
Our quantitative risk rating system, which tracks 260-day historical share price
volatility, suggests a Medium Risk rating for Tata Motors shares. We also assign a
Medium Risk flag, as a) the short-term debt raised to fund the JLR deal has been
refinanced, and b) the core CV business has improved sequentially from 3QFY09
lows.
The key risks that could prevent the shares from reaching our target price emanate
from: a) Weaker-than-forecast demand conditions for luxury cars and SUVs in
Europe and the US. Given the high leverage of this business to both volumes and
EPS, the key risk is if JLR volumes are lower than anticipated; b) Our CV forecasts
are predicated on our economist Rohini Malkani's view that industrial growth should
remain fairly healthy (in the 8-9% range), in both FY11/12E. c) We assume that the
credit and liquidity environment will remain stable. A credit 'crunch' could impact
consumer confidence and possibly JLR's sales (especially in developed markets).
Given TTMT's fairly leveraged balance sheet, this is a risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Autos
March 2011 Sales: Overall Healthy Volume Growth
2Wheelers (HH+TVS): Healthy sales growth at 25% YoY — 2Wheeler majors
reported strong March sales volume growth of 25% YoY (9% MoM). Motorcycles
(TVS+HH) volume rose a strong 24%, indicating a strong demand scenario. With
Bajaj launching the new Discover 125 on 31 March, we expect a marginal uptick in
April sales volumes for BJAUT. However, in the absence of details regarding Bajaj
Auto's sales figures, we are uncertain of market share.
Maruti Suzuki: domestic sales vols rise c39% YoY — Overall volume growth of 28%
YoY reflects a continued deterioration in exports (down 26% YoY). Per mgmt, one of the
plants at Manesar has started production in March, partly reflected in the March
dispatches. Discounts continue to be high on the Alto (cRs 22,000). Overall a FY11
sales figure of ~1.27mn is marginally lower (~1.7%) than our FY11 estimates. With
Hyundai reporting a flat March sales growth and Tata Motors' Indica reporting declining
volumes, we expect market share gains for MSIL.
Tata Motors: Modest March sales growth at 11% YoY — Domestic CV sales rose a
sedate 15% YoY, mainly reflecting a strong base of 4QFY10. CV demand seems to be
robust, in line with our forecast. However, Passenger Vehicles continue to disappoint in
March with a flat YoY growth (down 13% MoM). The Nano was a positive surprise with
a second consecutive month of positive volume growth (+85% YoY, +5% MoM).
However, Indica sales declined 40% YoY (-31% MoM) and TTMT seems to be the
biggest market-share loser in the A2 segment, which is expected to have the maximum
competitive intensity in FY12.
M&M: Healthy volume growth of 20% — Tractor sales volume rose a healthy 23%
YoY (+4% MoM), compensating for a more sedate 14% growth in passenger UV
volumes (strong FY10 base). 3W sales also rose a strong 32% YoY. We expect M&M's
FY12 sales to be robust on the back of a strong product pipeline and a slew of govt
incentives to the rural sector. The company's new tractor plant (annual capacity of
~100k, production to start in 2012) being set-up in Andhra Pradesh indicates that mgmt
expects strong demand growth in the sector. With a healthy volume growth trajectory,
M&M remains our top pick in the auto sector.
New model launches — 1) Bajaj Auto launched the new Discover 125cc, priced a Rs
45,500 (ex showroom Delhi). 2) Ashok Leyland-Nissan Joint Venture introduced its
first vehicle, 'Dost', a 55hp LCV. 3) Tata Motors launched new diesel and petrol
variants of Indica, called Indica eV2, priced between Rs 295,000 – Rs 395,000 (exshowroom,
Delhi). 4) Volkswagen launched the New Passat priced at Rs 2.08mn-Rs
2.57mn (ex-showroom Delhi).5) Hyundai Motors India launched the New Accent at
Rs 501,000(ex-showroom, Delhi)
March 2011: Healthy sales volume growth
Hero Honda: Hero Honda reported a very strong sales growth of 24% YoY. The
company had increased ad-spend during the Cricket World Cup. Per press reports
(Source: Economic Times, 17 March 2011), the company has set aside Rs 1bn for
promotional activities related to the new corporate identity (logo, branding etc) post
its split from Honda Motors.
TVS Motor: TVS Motor continued its strong sales growth trend with 27% YoY
growth for 2Wheelers (+24% for motorcycles). Scooter volumes at 42,655 rose a
healthy 50% YoY, partly reflecting a weak base of FY10.
TVS 3-wheelers also reported ~80% volume growth YoY, again on a weak FY10
base. We expect April-May 3W sales growth to be healthy for TVS Motor before the
base effect starts abating from June onwards.
Maruti Suzuki: Healthy domestic March sales volume
growth of 39%
Maruti's March domestic sales growth was a robust 39%, driven by the A2 segment,
which rose a strong 43% YoY. We expect Maruti's market share in this segment to
grow in March due to 1) Tata Motors' Indica volumes declining~40%YoY; 2)
Hyundai India's domestic sales rose a marginal 1%YoY; 3) General Motors India
reported production loss due to a worker's strike at its Halol plant (Source: Business
Standard 30 March 2011); and 4) Ford reported a sedate 11% YoY volume growth
(Source: Economic Times 1April 2011). However, the company continued offering
heavy discounts on the Alto, which may impact 4Q margins.
The A3 segment also rose a strong 33% YoY. While we do not have model sales,
we believe that the new SX4 diesel, introduced in Feb, partly aided in volume
growth in this segment.
The C segment (Omni+Eeco) continued its strong growth momentum with a ~33%
YoY volume growth.
Exports continued to disappoint with a 26% YoY decline in volumes, exacerbated by
the decline in demand in Middle East and Egypt. Mgmt attributed 6% decline in
FY11 export volumes to the end of scrappage incentive scheme in Europe.
According to the company’s press release, the EU accounted for 43% of export
volumes in FY11 as compared to 77% in FY10
Tata Motors: CV sales growth of 15% reflects strong base;
Passenger Vehicles sales volume disappoint
Tata Motors’ overall sales volumes in March rose a moderate 11%, mainly reflecting
a strong base of 4QFY10. CV sales growth was a healthy 15%, in line with our
expectations. Tata Motors' CV volumes suggest no impact from either the interest
rate hikes or price increases undertaken by the company in January.
However, passenger vehicles, especially the Indica, continue to be Tata Motors'
Achilles Heel. Despite launching a new variant of the Indica, called the Indica eV2,
the model's sales volumes declined c40% YoY (-31% MoM). With competitive
intensity not showing any signs of abatement, we are skeptical of Indica sales
volumes in the near term. Indigo sales also declined 5% YoY (down 20%MoM),
partly indicating the Manza effect wearing off. Nano volumes were a positive
surprise, rising 5% MoM (+85% YoY). The company also announced a price hike on
its passenger vehicles w.e.f. 1 April 2011, in order to counter input cost pressures.
Under the revised price, the Indica will be costlier by Rs 7,000-Rs 9,000, Vista and
Indigo CS by Rs 8,000-Rs 11,000 and Manza by Rs 10,000-Rs 15,000. The price of
Nano will, however, not be revised.
In the utility vehicles segment, depending upon the model, Sumo prices will go up
by Rs 13,000-Rs 15,000, Grande by Rs 16,000- Rs 19,000, Safari by Rs 18,000-Rs
29,000, Aria by Rs 30,000- Rs 36,000 and Venture by Rs 9,000-Rs 12,000.
M&M: Healthy sales volume growth of 20%
M&M's overall sales volumes rose ~20% YoY in March. Passenger UV sales rose a
modest 14%, reflecting a strong base. 3Ws continued to show healthy volume
growth momentum, rising 32% YoY. Tractor sales volume growth was a healthy
23%YoY. The company also announced the setting up of its new tractor plant in
Zaheerabad, Andhra Pradesh. With a total capacity of 100,000 tractors per annum,
the new plant will add nearly 50% to the existing tractor capacity. This indicates that
the mgmt is positive on the demand scenario for farm equipment in India. We
expect the growth trajectory to continue showing a positive trend, buoyed by fiscal
incentives granted to the rural sector by the government.
In the UV segment, in addition to the premium SUV and other variants on existing
Xylo platform, M&M will has announced that it will also launch two of Ssangyong's
SUVs, the Korando and Rexton, in India (Source: Economic Times, 1 April 2011).
We remain positive on M&M's growth prospects in UV and tractor segments, and
retain our top-pick status for the stock.
Bajaj Auto
(BAJA.BO; Rs1,459.50; 3L)
Valuation
Our target price of Rs1,390 is based on 13x June12E earnings. This is in line with
Bajaj's historical valuations. We forecast a healthy ~23% CAGR in earnings over
FY10-FY13E, but a relatively placid ~13% CAGR over FY11-13E (given strong EPS
growth of 44% Y/Y in FY11E). Historically, BJAUT's core auto business has traded
at a c20% discount to HROH, reflecting its weaker positioning within the domestic
motorcycle industry. The stock is now trading at par with Hero Honda as the latter
has de-rated, post Honda's exit from the JV. We have also de-rated Hero Honda to
bring it in line with Bajaj Auto, as HH's strengths and dominant market position will
be mitigated by the execution risks attendant with developing its own R&D, and also
its own branding.
Risks
We rate Bajaj Auto Low Risk, in line with the rating assigned by our quantitative risk
rating system, which tracks 260-day historical share price volatility. Factors
supporting our Low Risk rating are: a) healthy RoEs and strong free cash flows, and
b) lower capital intensity of the 2-wheeler business. Upside risks to our target price
include better than expected EBITDA margins, a better product mix, lower input
costs, and less competitive intensity.
Hero Honda
(HROH.BO; Rs1,602.65; 3L)
Valuation
Our target price of Rs1,443 is based on 13x June12E earnings. The multiple is at a
slight discount to the stock's long term historical average of ~13.7x, due to the
uncertainties regarding HH's market positioning, as well as R&D and brand related
issues, post its split with Honda. We have chosen to use the P/E valuation metric to
value Hero Honda, given the company's high level of cash generation, reflecting its
strong balance sheet (around Rs 53bn in cash and liquid investments).
Risks
We rate Hero Honda Low Risk according to our quantitative risk rating system,
which tracks 260-day historical share price volatility. The key downside risks that
could impede the stock from reaching our target price are: 1) Slower-than-forecast
growth in the two-wheeler industry, 2) Any substantial increase in interest rates and
greater than forecast increase in material costs; and 3) Greater than expected
increase in the competitive intensity. Upside risks to our target price include: 1)
Lower than expected market share losses, 2) Better margins, 3) Change in
corporate structure (technical collaboration, etc).
Mahindra & Mahindra
(MAHM.BO; Rs710.10; 1L)
Valuation
Our target price of Rs771 is based on a sum-of-parts methodology. We value
M&M's core business at Rs636/share (10.5x June2012E core CEPS, at a slight
discount to the historical average multiple). We also incorporate value for M&M's
listed subsidiaries (Rs135/share). Our subsidiary valuations are based on a 25%
discount to market prices of the listed subsidiaries. We have chosen P/CEPS to
value the core business to facilitate comparison with historical trading bands; the
company is undertaking a significant product development and capital expenditure
program, and also undertook a restructuring of the balance sheet in FY02. We
believe valuations will also be supported by M&M's listed subsidiaries.
Risks
We rate M&M shares Low Risk, in line with our quantitative risk rating system which
tracks 260-day historical share price volatility, and also reflecting a decline in capex
intensity, and improved business fundamentals have reduced earnings volatility. Key
risk factors to our investment thesis which could prevent the shares from reaching
our target price include: a) Any substantial rise in interest rates that could curb
demand for farm equipment and utility vehicles, b) Increase in raw material costs,
esp Steel and Rubber may put downward pressure on margins. c)Given M&M's
strong dependence on the rural economy (a substantial part of the demand for their
products emanates herein), any weak trend in the prices of agricultural commodities
could also impact demand and sales, d) Escalating competition within the UV
segment, which might lead to an increase in discounts and result in margin
pressure.
Maruti Suzuki India
(MRTI.BO; Rs1,274.35; 2L)
Valuation
Our target price for Maruti of Rs1,395 is based on Sum-of-Parts methodology. We
value the parent business at Rs1,318 based on 10x March FY12E cash earnings
(CEPS = PAT + depreciation). At 10x (earlier 11.5x) we value the parent business at
par with its historical average. We have cut it from 11.5x to 10x to reflect escalating
competitive pressures, commodity cost pressure, foreign currency exposure and our
concerns on the changing contours of the relationship between Suzuki Motors and
Maruti Suzuki. We value MSIL's subsidiaries at Rs77/share, based on 14x March
FY12E EPS. We estimate cash earnings CAGR of ~10% over FY10-FY13E, which
reflects a 6%YoY dip in FY11 before 21% and 15% upticks in FY12 and FY13
respectively. On our target multiple, Maruti would trade at FY12 E P/E (including
subsidiary earnings) of around 14.6 x (slightly lower than the broad market at ~16x).
We prefer price/cash earnings as a valuation metric for the automobile sector, given
the industry's high capital intensity (both in terms of capacity and product
development). Moreover, MSIL's depreciation policy is per IFRS standards, and is
thus more aggressive than those of peers.
Risks
We rate Maruti Low Risk. This is in line with the Low Risk suggested by our
quantitative risk-rating system, which tracks 260-day historical share price volatility,
and we believe warranted by improving macro trends for the auto sector, in our
view. Upside risks that could prevent the stock from reaching our target price
include: 1) greater than forecast increase in volumes and realizations; and 2)
decline in competitive intensity. Downside risks include: 1) sales of passenger
vehicles are sensitive to economic variables with an appreciable rise in interest
rates potentially hitting volume growth across the auto sector; 2) higher than
forecast increase in commodity costs; 3) competitive pressures in the Indian market
continue to increase, which could impact margins over the longer term; 4)
unfavorable foreign currency rates
Tata Motors
(TAMO.BO; Rs1,242.90; 1M)
Valuation
Our Rs1,533 target price for Tata Motors is based on a sum-of-the-parts valuation.
We value Tata Motors' core business at Rs773/share (on a share count of 611m
shares), based on 8.5x Mar12E EV/EBITDA (rolled forward from Dec11). We value
subsidiaries and investments at Rs91/share. We attribute around Rs670/share to
JLR - we value this at 4x Mar12E EV/EBITDA, which equates to around
Rs808/share and then deduct the total net debt which amounts to around
Rs138/share. At our target price, TTMT would trade at a consolidated price-to-book
value of 4.8x / 3.1x (FY11/12E), which appears reasonable when juxtaposed
against ROEs of 45%, 38% in FY11E/12E respectively. On a P/E basis, the stock
would trade at ~10.6x and 8.2x FY11E/12E EPS.
Risks
Our quantitative risk rating system, which tracks 260-day historical share price
volatility, suggests a Medium Risk rating for Tata Motors shares. We also assign a
Medium Risk flag, as a) the short-term debt raised to fund the JLR deal has been
refinanced, and b) the core CV business has improved sequentially from 3QFY09
lows.
The key risks that could prevent the shares from reaching our target price emanate
from: a) Weaker-than-forecast demand conditions for luxury cars and SUVs in
Europe and the US. Given the high leverage of this business to both volumes and
EPS, the key risk is if JLR volumes are lower than anticipated; b) Our CV forecasts
are predicated on our economist Rohini Malkani's view that industrial growth should
remain fairly healthy (in the 8-9% range), in both FY11/12E. c) We assume that the
credit and liquidity environment will remain stable. A credit 'crunch' could impact
consumer confidence and possibly JLR's sales (especially in developed markets).
Given TTMT's fairly leveraged balance sheet, this is a risk.
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