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1Q preview
In 1Q FY12, we expect auto companies in our coverage to post 19% yoy revenue
growth driven by steady volume growth and improved realisations.
Operating leverage benefits are likely to partially offset rising input cost pressures; we
expect net profit for our coverage universe to increase 13% yoy in 1Q.
We expect car / CV volumes to recover from H2FY12 onwards; 2Ws seem to be
unaffected.
Bajaj Auto and Maruti Suzuki remain our top picks.
Volume growth – a mixed bag – Rising inflationary pressure, higher interest rates and
slower economic growth have led to slower growth for cars / CVs in 1Q FY12. But the
domestic two-wheeler industry seems insulated from the prevailing tough macro-conditions.
While the rest of the automobile industry witnessed slower growth, 2Ws continued to grow at a
strong run-rate. The top three 2W manufacturers reported 20% yoy growth (8% qoq over a
high base) in sales in 1Q FY12.
2Ws to post strong earnings growth, MSIL / ALL to underperform – Strong volume
growth and improved average realisations are likely to boost earnings for 2W manufacturers
(we expect combined 27% yoy earnings growth in 1Q). For M&M, we expect operating
leverage benefits to partially overcome rising input cost pressure (expect 11% yoy earnings
growth). For Tata Motors, improved performance at JLR is likely to offset slower earnings
growth at the standalone entity (expect 14% yoy consol earnings growth). Only MSIL and
Ashok Leyland are likely to post earnings decline primarily on account of slower volume offtake
for both companies.
Valuation – The domestic 2W sector seems to be insulated from the prevailing tough macroconditions.
Bajaj Auto, with strong volume growth both in domestic and export markets,
continues to be our top pick. We also like Maruti Suzuki and believe valuation concerns are
overdone and expect volumes to bounce back from 2Q onwards (led by inventory filling as
well as new model launches). Improved monthly volumes as well as margins (led by volume
growth and softening commodity prices) are likely to be key triggers for the stock. We also like
Tata Motors. With its key CV portfolio as well as JLR volumes reporting steady volume growth,
we expect Tata Motors to maintain its margins even in FY12 and hence expect the stock to
bounce back to its average valuation multiple. We have IN-LINE ratings on both Hero Honda
and TVS Motor, primarily on valuation concerns.
Two-wheeler majors
The domestic two-wheeler industry seems to be insulated from the tough macro-conditions
prevailing in the economy. While the rest of the auto industry witnessed slow growth, 2Ws
continued to grow at a strong run-rate. The top three manufacturers reported strong 20% yoy
growth (8% qoq over a high base) in sales in 1Q FY12.
Bajaj Auto
BAL has sold a record high 1.1m vehicles in 1Q FY12 – growth of 18% yoy and 15% qoq. While
motorcycle sales grew 16% yoy (+15% qoq) to 0.96m, 3Ws were up 30% yoy (+16%qoq) to
129,764 units. Exports in the quarter were up 32% yoy to 427,364 units. Bajaj Auto has also
hiked product prices by about 1.5-2% across all models with effect from Apr ’11 in the domestic
market and from May ’11 in the export markets.
Led by strong volume growth and improved realisations (price hikes and higher exports), we
expect BAL to post 26% yoy growth in net sales to Rs49bn. Stronger revenue growth is likely to
offset input cost pressure. We expect margins to remain stable yoy (-50bps qoq) at 20%. Driven
by strong revenue growth and stable margins, net profit is likely to grow 30% yoy (+13%qoq) to
Rs7.7bn in 1Q FY12.
1Q auto ancillary preview
In 1Q FY12, we expect companies within our coverage universe to post 24% yoy growth in
revenue driven by the strong demand from domestic OEMs and improved export offtake
We expect operating margins to decline ~200bps yoy led by rising cost pressures
Led by strong revenue growth, we expect overall earnings for our coverage space to grow
12% yoy
Exide Industries and Apollo Tyres remain our top picks
We also like Bharat Forge and Amtek Auto within our coverage space.
Key Highlights:
We expect the auto-ancillary space to post strong revenue growth in 1Q driven by steady OE
growth as well as a strong replacement growth. However, rising cost pressures are likely to
impact margins (we expect overall 200bps margin impact in 1Q). On account of strong
revenue growth, however, we expect overall earnings to grow 12% yoy.
In the case of Apollo Tyres, strong volume growth and substantially improved realisations are
likely to drive 30% yoy revenue growth. However, sharp increase in input costs is likely to hurt
operating performance – we factor in 290bps margin decline over a high base to 8%; as a
result, we expect Apollo to post 35% yoy decline in earnings in 1Q.
For Bharat Forge, we expect steady OE demand, strong replacement and non-auto demand
to drive 19% yoy growth for the consolidated entity. We expect margins to decline 70bps yoy
yoy to 17.5%. As a result, we expect earnings to grow 43% yoy to Rs890m.
In the case of Exide, the margin recovery story is likely to continue driven by an improved
product mix favoring the replacement segment as well as a strong volume growth – we factor
in 20% yoy revenue growth, 210bps qoq improvement in margins and 22% qoq growth in
earnings.
Driven by a steady volume ramp up in both domestic and export markets and stable margins
qoq at 23%, we expect Amtek to post 43% yoy growth in earnings to Rs956m in 4Q.
Valuation – Our top picks are Exide Industries (margin revival on track) and Apollo Tyres
(best player in the domestic industry, Vredestein supporting consolidated earnings, South
African operations likely to bounce back). We also like Bharat Forge (revenues and margin
expansion to be driven by non-auto ramp-up, power business to drive incremental earnings in
the long term) and Amtek Auto (attractively valued at 6.9x FY12E earnings and at 4.9x
EV/EBIDTA).
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