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Sector earnings growth to moderate to 14% in FY11-13E; turning NEUTRAL
Most positive on cars followed by 2W; best for CV sales seems to be over
Downgrading TTMT to HOLD, as we expect earnings momentum to slow
Maruti is top pick on strong volumes, stable margins and cheap valuation
Switch from CVs to cars
Sector earnings growth to moderate to 14% over FY11-13E
We estimate earnings CAGR for our auto sector universe will slow to 14% (18%
ex-Tata Motors) over FY11-13, from 168% CAGR (45% ex-Tata Motors) over
FY09-11. This is a result of volume growth across segments coming off to 13-18%
after 25-35% growth in FY10 and FY11. We also expect higher input prices to
drive gross margin contraction of about 80bp over FY11-13, after the 280bp y-y
gross margin contraction in FY11. We revise our industry outlook to NEUTRAL,
from Improving.
Most positive on cars followed by two-wheelers
Recent management interactions as well as series of elaborate dealer checks
make us most positive on passenger cars, among all auto segments. Low
penetration of cars per household, ease of financing and increase in per capita
income (in excess of increase in cost of ownership) supports our thesis. We
expect passenger car volumes (including utility vehicles) to grow 17% in FY12
and 16% in FY13. For two-wheelers, we expect volume CAGR to taper off to 15%
over FY11-13 after two years of 26% growth.
CV cycle – best years behind us, in our view
We believe the best years of the commercial vehicle (CV) cycle are behind us.
After two years of 35%+ growth, we expect truck sales growth to moderate.
Historically, CV cycles have lasted for 4-5 years with two high-growth years. Our
industry volume growth forecast of 15% for FY12 and 10% for FY13 is based on a
fleet expansion rate of 11% in FY12 and FY13, in line with previous peaks.
Downgrading Tata Motors to HOLD; Maruti is our top pick
We downgrade Tata Motors (TTMT) to HOLD (from Buy), as we believe both the
domestic and Jaguar LandRover (JLR) businesses are on the verge of entering a
low growth phase. We estimate consolidated EPS CAGR to slow to 7% over
FY11-13.
Our top pick in the auto space is Maruti as we are most positive on cars of all the
auto segments and believe the company should grow just a notch below the
industry growth rate. We expect Maruti’s margins to bottom out in FY11, helped
by recent price hikes, JPY depreciation and operating leverage. We also believe
that low industry profitability will not support prolonged price competition. We are
building in 20% EPS CAGR for Maruti over FY11-13. We find the stock attractive
at 12.3x our consolidated FY12 EPS estimate, a 10% discount to the historical
average.
Tata Motors: Downgrading to HOLD
We downgrade TTMT to HOLD (from Buy), as we believe the domestic and JLR
businesses are on the verge of entering a low-growth phase. On the domestic side, we
are now past the high-growth years of the CV cycle. The company’s passenger car
business continues to lose market share in key segments. For subsidiary JLR, we
expect volume CAGR to slow to 10-11% over FY11-13 and margins to contract, due to
the bottoming out of incentives, diminishing operating leverage benefit, and reversal of
the forex gains of 2010.
We estimate TTMT’s earnings CAGR will slow to 7% over FY11-13. We cut our SoTPbased-
TP to INR1,245 (from INR1,406), comprising INR454 for the parent (based on a
mid-cycle FY12E EV/EBITDA multiple of 7x (earlier 8x)), INR654 for JLR (based on 4x
FY12E EV/EBITDA, in line with European peers using Bloomberg consensus
estimates), and INR137 for subsidiaries/ investments. (For details see our report
Earnings momentum to slow (21 April 2011).)
Maruti: Our top pick
We believe cars will outperform all other auto segments in terms of volume growth in
FY12, and Maruti should be able to grow largely in line with the industry growth rate
(16% vs 17% industry growth on our estimates). We also believe Maruti’s margins will
bottom out in FY11 and improve going into FY12, helped by recent price hikes, JPY
depreciation and operating leverage on strong volume growth. We are building in 20%
EPS CAGR for Maruti over FY11-13E. We find the stock attractive at 12.3x our
consolidated FY12 EPS estimate, a 10% discount to the historical average.
We raise our EPS estimates 4% FY12 and 9% for FY13, on higher volume (post our
dealer checks and as we build in RIII model volumes) and margin estimates (on
operating leverage and JPY depreciation). Our revised TP of INR1,525 (INR1,465
previously) is based on a sum of 15x our FY12E standalone EPS and 5% for
subsidiaries, implying a 21% potential upside from current levels. (For details see our
report Our top pick (21 April 2011).)
Ashok Leyland: Cutting TP to mid-cycle multiple
We cut our EPS estimates 10% for FY12 and 9% for FY13, as we have reduced our
volume and margin assumptions. We now estimate 13% volume growth (company
guidance of more than 15%) for FY12 and 9% for FY13. Despite lowering our volume
estimates, we build in 18% EPS CAGR over FY11-13, helped by relatively stable
margins.
We cut our TP to INR70 (from INR85), based on a target FY12E EV/EBITDA of 7x
(earlier 8x), in line with the sector’s historical mid-cycle multiple, as we believe the
industry is now past the high growth phase of the CV cycle.
Bajaj Auto: Adjusting estimates and TP for FY11 guidance miss
We are adjusting our FY11 volume numbers for the 4% FY11 volume guidance. We
reduce our FY12 and FY13 volume estimates by 4% each as we maintain our volume
growth assumptions. We cut our FY12 EPS estimate by 3% and , consequently, our TP
comes down to INR1,600 (from INR1,650), based on 15x target FY12E EPS.
Hero Honda: Minor tweaks to estimates and TP
We are adjusting our FY11 volume numbers for the marginal volume beat. Therefore,
we increase our FY12 EPS forecast by 2%. Our TP moves up marginally to INR1,630
(from INR1,600), based on 14x target FY12E EPS.
Mahindra: Increasing TP on higher volume growth in tractors
We are increasing our tractor volume estimate for FY12 by 7% following strong growth
trends and positive management commentary. We also expect the margin contraction
to be less sharper than we previously estimated in view of low competitive intensity in
Mahindra’s key utility vehicles and tractor segments. As a result, our standalone FY12
EPS estimate for Mahindra increases by 7%. Our SoTP-based TP for M&M moves up
to INR817 (from INR765) as we account for the increased standalone EPS estimate
and as we update the market values of subsidiaries/associates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sector earnings growth to moderate to 14% in FY11-13E; turning NEUTRAL
Most positive on cars followed by 2W; best for CV sales seems to be over
Downgrading TTMT to HOLD, as we expect earnings momentum to slow
Maruti is top pick on strong volumes, stable margins and cheap valuation
Switch from CVs to cars
Sector earnings growth to moderate to 14% over FY11-13E
We estimate earnings CAGR for our auto sector universe will slow to 14% (18%
ex-Tata Motors) over FY11-13, from 168% CAGR (45% ex-Tata Motors) over
FY09-11. This is a result of volume growth across segments coming off to 13-18%
after 25-35% growth in FY10 and FY11. We also expect higher input prices to
drive gross margin contraction of about 80bp over FY11-13, after the 280bp y-y
gross margin contraction in FY11. We revise our industry outlook to NEUTRAL,
from Improving.
Most positive on cars followed by two-wheelers
Recent management interactions as well as series of elaborate dealer checks
make us most positive on passenger cars, among all auto segments. Low
penetration of cars per household, ease of financing and increase in per capita
income (in excess of increase in cost of ownership) supports our thesis. We
expect passenger car volumes (including utility vehicles) to grow 17% in FY12
and 16% in FY13. For two-wheelers, we expect volume CAGR to taper off to 15%
over FY11-13 after two years of 26% growth.
CV cycle – best years behind us, in our view
We believe the best years of the commercial vehicle (CV) cycle are behind us.
After two years of 35%+ growth, we expect truck sales growth to moderate.
Historically, CV cycles have lasted for 4-5 years with two high-growth years. Our
industry volume growth forecast of 15% for FY12 and 10% for FY13 is based on a
fleet expansion rate of 11% in FY12 and FY13, in line with previous peaks.
Downgrading Tata Motors to HOLD; Maruti is our top pick
We downgrade Tata Motors (TTMT) to HOLD (from Buy), as we believe both the
domestic and Jaguar LandRover (JLR) businesses are on the verge of entering a
low growth phase. We estimate consolidated EPS CAGR to slow to 7% over
FY11-13.
Our top pick in the auto space is Maruti as we are most positive on cars of all the
auto segments and believe the company should grow just a notch below the
industry growth rate. We expect Maruti’s margins to bottom out in FY11, helped
by recent price hikes, JPY depreciation and operating leverage. We also believe
that low industry profitability will not support prolonged price competition. We are
building in 20% EPS CAGR for Maruti over FY11-13. We find the stock attractive
at 12.3x our consolidated FY12 EPS estimate, a 10% discount to the historical
average.
Tata Motors: Downgrading to HOLD
We downgrade TTMT to HOLD (from Buy), as we believe the domestic and JLR
businesses are on the verge of entering a low-growth phase. On the domestic side, we
are now past the high-growth years of the CV cycle. The company’s passenger car
business continues to lose market share in key segments. For subsidiary JLR, we
expect volume CAGR to slow to 10-11% over FY11-13 and margins to contract, due to
the bottoming out of incentives, diminishing operating leverage benefit, and reversal of
the forex gains of 2010.
We estimate TTMT’s earnings CAGR will slow to 7% over FY11-13. We cut our SoTPbased-
TP to INR1,245 (from INR1,406), comprising INR454 for the parent (based on a
mid-cycle FY12E EV/EBITDA multiple of 7x (earlier 8x)), INR654 for JLR (based on 4x
FY12E EV/EBITDA, in line with European peers using Bloomberg consensus
estimates), and INR137 for subsidiaries/ investments. (For details see our report
Earnings momentum to slow (21 April 2011).)
Maruti: Our top pick
We believe cars will outperform all other auto segments in terms of volume growth in
FY12, and Maruti should be able to grow largely in line with the industry growth rate
(16% vs 17% industry growth on our estimates). We also believe Maruti’s margins will
bottom out in FY11 and improve going into FY12, helped by recent price hikes, JPY
depreciation and operating leverage on strong volume growth. We are building in 20%
EPS CAGR for Maruti over FY11-13E. We find the stock attractive at 12.3x our
consolidated FY12 EPS estimate, a 10% discount to the historical average.
We raise our EPS estimates 4% FY12 and 9% for FY13, on higher volume (post our
dealer checks and as we build in RIII model volumes) and margin estimates (on
operating leverage and JPY depreciation). Our revised TP of INR1,525 (INR1,465
previously) is based on a sum of 15x our FY12E standalone EPS and 5% for
subsidiaries, implying a 21% potential upside from current levels. (For details see our
report Our top pick (21 April 2011).)
Ashok Leyland: Cutting TP to mid-cycle multiple
We cut our EPS estimates 10% for FY12 and 9% for FY13, as we have reduced our
volume and margin assumptions. We now estimate 13% volume growth (company
guidance of more than 15%) for FY12 and 9% for FY13. Despite lowering our volume
estimates, we build in 18% EPS CAGR over FY11-13, helped by relatively stable
margins.
We cut our TP to INR70 (from INR85), based on a target FY12E EV/EBITDA of 7x
(earlier 8x), in line with the sector’s historical mid-cycle multiple, as we believe the
industry is now past the high growth phase of the CV cycle.
Bajaj Auto: Adjusting estimates and TP for FY11 guidance miss
We are adjusting our FY11 volume numbers for the 4% FY11 volume guidance. We
reduce our FY12 and FY13 volume estimates by 4% each as we maintain our volume
growth assumptions. We cut our FY12 EPS estimate by 3% and , consequently, our TP
comes down to INR1,600 (from INR1,650), based on 15x target FY12E EPS.
Hero Honda: Minor tweaks to estimates and TP
We are adjusting our FY11 volume numbers for the marginal volume beat. Therefore,
we increase our FY12 EPS forecast by 2%. Our TP moves up marginally to INR1,630
(from INR1,600), based on 14x target FY12E EPS.
Mahindra: Increasing TP on higher volume growth in tractors
We are increasing our tractor volume estimate for FY12 by 7% following strong growth
trends and positive management commentary. We also expect the margin contraction
to be less sharper than we previously estimated in view of low competitive intensity in
Mahindra’s key utility vehicles and tractor segments. As a result, our standalone FY12
EPS estimate for Mahindra increases by 7%. Our SoTP-based TP for M&M moves up
to INR817 (from INR765) as we account for the increased standalone EPS estimate
and as we update the market values of subsidiaries/associates.
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