Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Automobiles
Equity Research
Two-way impact of the rate cycle: demand growth and valuation
Rising evidence of cyclical risks: decline in walk-ins, rising rates
In the context of our opinion on the Indian auto sector (Increasing cyclical
risks; downgrading Hero Honda, M&M to Sell, dated 27 January 2011), we
note two important recent developments that support our view: 1) Maruti
Suzuki in its earnings conference call on April 26 indicated a decline in
customer walk-ins and conversion ratios at the dealerships, citing high fuel
and interest costs as key constraints. Hyundai Motor India reported a
similar trend in its April 2011 monthly sales release (source: Economic
Times). We believe this is one of the first signs of higher interest costs
beginning to affect consumer confidence, after the strong demand
momentum of the last two years. 2) The Reserve Bank of India has hiked
the key policy rate by 50 basis points, in line with the GS Global ECS
team’s expectations, and a bit ahead of consensus, leading to a sell-off in
Indian auto stocks (BSE Auto Index down over 3.5%)..
Two-pronged impact of the cycle: demand growth, valuation
Our analysis suggests that historically: 1) Indian auto demand growth has
been inversely correlated with inflation and interest rates (R-squared of 50-
80%). Hence, we believe that demand growth is likely to normalize, and
could even fall below normal during FY2012-13E. 2) Sector valuation as a
multiple of balance sheet values (P/B, EV/IC) is correlated with the demand
cycle (R-squared 50%), thus normalization in demand could pose downside
risks to valuation multiples. We believe this is an important factor that is
being overlooked by the market: our target prices for the coverage group
are on average 13% below the Bloomberg consensus mean.
Sell M&M; Buy Ashok Leyland; highlight TVS Motor, Maruti Suzuki
We note that M&M and TVS Motor are trading either at peak or at a
premium to their historical averages on P/B and EV/IC, and Ashok Leyland,
Maruti Suzuki and Apollo Tyres are trading at a discount to the historical
average. We like companies with industry-leading margins, namely Bosch
India and Bajaj Auto, as we believe the earnings of these companies are
likely to be relatively more resilient in a slowing growth and higher
commodity cost environment. We adjust our earnings estimates for M&M
and Tata Motors for FY11-13E by 3%-5%, mainly on higher margin
assumptions. Risks: higher/lower than expected demand growth and
commodity costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Automobiles
Equity Research
Two-way impact of the rate cycle: demand growth and valuation
Rising evidence of cyclical risks: decline in walk-ins, rising rates
In the context of our opinion on the Indian auto sector (Increasing cyclical
risks; downgrading Hero Honda, M&M to Sell, dated 27 January 2011), we
note two important recent developments that support our view: 1) Maruti
Suzuki in its earnings conference call on April 26 indicated a decline in
customer walk-ins and conversion ratios at the dealerships, citing high fuel
and interest costs as key constraints. Hyundai Motor India reported a
similar trend in its April 2011 monthly sales release (source: Economic
Times). We believe this is one of the first signs of higher interest costs
beginning to affect consumer confidence, after the strong demand
momentum of the last two years. 2) The Reserve Bank of India has hiked
the key policy rate by 50 basis points, in line with the GS Global ECS
team’s expectations, and a bit ahead of consensus, leading to a sell-off in
Indian auto stocks (BSE Auto Index down over 3.5%)..
Two-pronged impact of the cycle: demand growth, valuation
Our analysis suggests that historically: 1) Indian auto demand growth has
been inversely correlated with inflation and interest rates (R-squared of 50-
80%). Hence, we believe that demand growth is likely to normalize, and
could even fall below normal during FY2012-13E. 2) Sector valuation as a
multiple of balance sheet values (P/B, EV/IC) is correlated with the demand
cycle (R-squared 50%), thus normalization in demand could pose downside
risks to valuation multiples. We believe this is an important factor that is
being overlooked by the market: our target prices for the coverage group
are on average 13% below the Bloomberg consensus mean.
Sell M&M; Buy Ashok Leyland; highlight TVS Motor, Maruti Suzuki
We note that M&M and TVS Motor are trading either at peak or at a
premium to their historical averages on P/B and EV/IC, and Ashok Leyland,
Maruti Suzuki and Apollo Tyres are trading at a discount to the historical
average. We like companies with industry-leading margins, namely Bosch
India and Bajaj Auto, as we believe the earnings of these companies are
likely to be relatively more resilient in a slowing growth and higher
commodity cost environment. We adjust our earnings estimates for M&M
and Tata Motors for FY11-13E by 3%-5%, mainly on higher margin
assumptions. Risks: higher/lower than expected demand growth and
commodity costs.
No comments:
Post a Comment