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Strong demand growth witnessed in the Indian auto sector in
FY2010 and FY2011 showed signs of slowing down during
1QFY2012. Although the overall auto sector reported healthy
growth of ~18% YTD in FY2012, it was primarily driven by the
two-wheeler and three-wheeler segments. We expect our auto
universe to report ~18% yoy growth in revenue during
1QFY2012 on the back of ~17% yoy jump in volumes. However,
on a sequential basis, revenue is expected to decline by ~10%,
led by a qoq decline in passenger vehicle (PV) and commercial
vehicle (CV) volumes. While the strong growth momentum in
two-wheelers and light commercial vehicles (LCV) continued in
1QFY2012, cumulative effects of rising interest rates and a sharp
increase in fuel prices resulted in slowing PV and medium and
heavy commercial vehicles (M&HCV) demand. We expect the
near-term demand environment to remain challenging for the
auto sector due to increased ownership cost for consumers.
The long-term demand momentum is expected to remain
healthy, aided by positive consumer sentiment, rising income
levels, easy availability of finance and new launches.
Under pressure EBITDA margin to restrict profitability
We expect operating margin of companies in our auto universe
to remain under pressure in 1QFY2012 on account of a yoy
increase in raw-material costs. On a sequential basis though,
commodity prices have remained more or less stable. Key raw
materials such as steel, aluminum, plastic and rubber witnessed
average increases of ~6%, ~18%, ~1% and ~38% yoy,
respectively, during 1QFY2012. However, we believe average
price increases of ~2% by auto makers during the quarter and
ongoing cost-reduction initiatives will dilute the impact of input
cost inflation to a certain extent. As a result, we expect a marginal
~50bp yoy contraction in EBITDA margin to ~12%. On the net
profit front, our auto universe is expected to report a ~9% yoy
increase in profitability, while it is expected to decline by ~13%
on a qoq basis.
Interest rate, fuel price and commodity price trend
Financing plays an important role for the auto industry and
interest rates exhibit a negative correlation with auto volume
growth. Monetary tightening by the RBI to rein inflation has
been pushing interest rates up, leading to increased cost of
ownership for consumers. Further, the government's policy of
deregulating petrol prices to control the fiscal deficit has led to
a sharp increase in petrol prices since the beginning of CY2011.
Petrol and diesel prices have been hiked by `7.5/litre and
`3.4/litre YTD in CY2011. This has negatively affected ownership
cost and freight operators' profitability and has moderated auto
volume growth. Further, commodity prices in general have
witnessed a slight uptick during the quarter on a yoy basis, with
prices of key raw materials, steel and aluminum, increasing by
6-18% yoy. Rubber and lead prices also rose by ~38% and
~30% yoy, respectively, during the quarter.
Auto index underperforms the Sensex
The auto index underperformed the Sensex during 1QFY2012,
registering a decline of 5.3% versus losses of 3.1% posted by
the Sensex. The underperformance can be attributed to growing
concerns regarding volume growth in the sector due to
headwinds in the form of rising interest rates and higher vehicle
and fuel prices. Index heavyweights, Tata Motors and Maruti
performed poorly as compared to the auto index, down 15%
and 3%, respectively. During the quarter, Tata Motors’ share
price declined by 20% on account of lower-than-expected
4QFY2011 performance. Maruti Suzuki fell by 8% on concerns
that the strike at the Manesar plant will hurt the company’s
volume and profitability. On the other hand, Hero Honda, Exide
Industries and Apollo Tyres outperformed the auto index by 24%,
19% and 18%, respectively.
CV sector to ride on LCV demand
In FY2011, the CV industry grew by robust 30.4% yoy, driven
by significant recovery in economic and industrial activity, healthy
freight availability and improvement in agricultural production.
Despite higher vehicle prices and interest rates, the CV industry
has grown at a healthy rate of ~15% YTD in FY2012. During
the quarter, the LCV segment grew by robust 22.8% YTD in
FY2012, while the M&HCV segment witnessed moderate growth
of 5.6%. However, multiple headwinds in the form of higher
interest rates, diesel prices and moderation in near-term
economic growth are expected to negatively affect transporter
profitability, leading to a slowdown in growth momentum.
As such, we expect the CV sector to register a CAGR of 10-12%
over the next two years, with the LCV segment expected to drive
growth as it is estimated to grow at a relatively high rate of
16-18% during the same period. During 1QFY2012,
Tata Motors recorded 18% yoy growth on account of 25% yoy
growth in the LCV segment. Going ahead, new product launches
(Magic, Iris and Ace) are expected to drive volume growth.
Ashok Leyland, on the other hand, witnessed a 9.9% yoy dip in
volumes, led by a 14.2% yoy fall in the M&HCV goods segment.
PV segment – Sluggish demand; Competition to
intensify with new launches
PVs witnessed a slowdown in volume growth during 1QFY2012,
plagued by macroeconomic concerns such as rising interest
rates, fuel price hikes and declining consumer confidence. As a
result, the industry registered sluggish yoy volume growth of
10.6% YTD in FY2012. Going ahead, we expect the slowdown
in demand to continue for the next couple of months with revival
likely in 2HFY2012, led by festival demand. However, we
estimate the PV segment to register a CAGR of 10-12% over
the next two years on account of buoyant long-term expected
economic growth, low penetration levels and increasing
disposable income. During 1QFY2012, market leader, Maruti
witnessed sluggish volume growth in domestic markets due to
which it reported a 0.6% yoy decline in sales. The primary reason
for sluggish growth can be attributed to the slowdown in the
dominant A2 segment, which increased marginally by 0.3%
yoy. In terms of market share, Maruti conceded ~200bp of
market share to competition in domestic markets YTD in FY2012
and its share now stands at 43.7%. We expect Maruti's market
share to remain under pressure, ahead of several new small
car launches that are lined up in FY2012.
Two-wheeler growth relatively insulated
The two-wheeler segment maintained its growth momentum
and posted strong 19.8% yoy growth YTD in FY2012. Sales
volume continues to defy the slowdown witnessed in PV and CV
sales as the increase in interest rates and fuel prices is believed
to have a negligible impact on overall two-wheeler volumes.
Further, improving supplies across the domestic motorcycle
segment coupled with high growth in the exports market aided
the two-wheeler segment's growth. The dominant motorcycle
segment posted robust 21% yoy growth, while the scooters and
mopeds segments reported 15% and 20% yoy growth in
volumes, respectively. Hero Honda led the two-wheeler pack,
registering impressive growth of 24% yoy, backed by the strength
of its market reach and strong performance in the rural market.
Bajaj Auto reported a healthy 18% yoy increase in motorcycle
volumes on the back of strong traction in Pulsar and Discover.
Led by superior sales growth, Hero Honda regained a market
share of 282bp at the expense of Bajaj Auto and TVS in the
domestic two-wheeler segment, and its YTD FY2012 market
share stands at 46.8% as against 19.6% and 14.2% for
Bajaj Auto and TVS, respectively. Going ahead,
we expect the two-wheeler segment to report strong volume
performance and register a 14-15% CAGR in volumes over the
next couple of years.
Auto ancillaries to track the auto sector
The auto ancillaries sector, which derives 70-75% of its revenue
from OEMs, has benefitted from strong growth in domestic
automobile production in the last two years and is estimated to
have grown at a robust rate of 20-25% during the period.
The sector's growth has been driven by the domestic OEM
segment, which has witnessed a CAGR of ~25% in
FY2009-11. Further, exports, which account for ~17% of the
auto component industry, are estimated to have grown at a
rate of ~15% during the period on the back of recovery in the
cars and light trucks segment in the US in CY2010, after a
21% yoy decline in CY2009. The US and European Union are
the major export destinations for Indian auto component
manufacturers, contributing 60-65% to the sector's export
revenue. Going ahead, we expect the auto component industry
to register moderate growth as domestic OEM demand is
expected to ease after witnessing strong volume growth over
the last two years. However, exports are likely to grow at a
healthy rate on revival in the automobile industry across the
globe and increased penetration of domestic auto component
players in key export markets over the next couple of years.
Further, with India emerging as a global automotive
manufacturing hub, foreign players are setting up their facilities
in the country, and this is expected to aid sourcing of components
from the country over the long term. Replacement demand in
the industry is expected to grow at a steady rate of 8-10%,
although the threat of cheaper Chinese imports will remain a
major concern for domestic manufacturers. Companies in the
subsegments of the auto components sector (tyres, bearings
and batteries), with a larger share of revenue from the
replacement and domestic markets, are likely to register strong
growth in the next couple of years.
Outlook
Considering the near-term macroeconomic challenges,
we expect the auto industry to register moderate volume growth
of 12-13% for FY2012. However, we believe low penetration
levels coupled with a healthy and sustainable economic
environment and favourable demographics supported by
increasing per capita income levels will drive long-term growth
of the Indian auto industry. As such, we prefer stocks that have
strong fundamentals, ability to deliver strong top-line
performance and are available at attractive valuations.
We continue to prefer companies in the auto sector with a strong
pricing power and high exposure to rural and exports markets.
We prefer M&M among auto heavyweights. In the ancillary
space, we maintain our positive stance on Exide Industries,
Apollo Tyres and JK Tyres.
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