India Autos - Management meeting takeaways ::JP Morgan

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 We hosted the managements of Ashok Leyland and Mahindra and
Mahindra in the US. Key takeaways follow:
 Mahindra & Mahindra – volume outlook: Management indicated that
industry growth rates are likely to be in the range of 10-12% for tractors
and 11-13% for UVs in FY12. The OEM is ramping up production of
the ‘Yuvraj’ tractor to 20,000 units in the year (from 10,000 in FY11);
on UVs – they expect to launch the new W201 SUV by the end of the
year.
 Financing trends: Given the current regulatory changes regarding bank
funding for NBFCs, funding costs could rise by 150bps for institutions
that provide financing in rural areas. The proportion of tractors bought on
financing has reduced to 75% currently (vs.90% earlier) as agri incomes
have risen considerably.
 Ssangyong: In FY12, management is targeting volume growth of 50% to
c.120,000 units and sales of $3B. While the OEM will likely have a cash
break even, they do not expect to break even at the PBT level. They will
have to incur higher expenditures on branding and product development,
given the underinvestment in the business over the past few years by
previous management teams.
 Ashok Leyland – volume outlook: Management expects domestic
M/HCV industry growth to come in at 8% yoy, with buses growing at
5% and trucks growing at 9% yoy. They highlighted that their sales
growth in FY12E was likely to come in at 107,000 units (+14% yoy). Of
the above, the domestic sales would likely come in at 95,000 units, while
exports would come in at 12,000 units.
 On near-term market share loss: Sales in southern India (which is
Ashok Leyland’s dominant market) were weak due to the postponement
of purchases ahead of the recent state elections in Tamil Nadu. They
expect sales growth to revive over 2HFY12E given: a) economic
activity/infrastructure investments will likely pick up, and b) a benign
base effect (due to the preponement of purchases in 1HFY11 ahead of
the roll-over to BSIII norms in Oct’10).
 Margin outlook: Ashok Leyland management is expecting margins to
come in at 10.5 – 11% (flat yoy) during FY12. The ramp up of
production at the tax-free Uttarakhand will drive cost savings, which will
protect profitability. The production is targeted to expand to 36,000
units in FY12 (from 13,000 units in FY11). Given tax savings of
c.Rs.40,000 per unit, it should lead to cost savings of c.Rs.1.5B.