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Automobile (S.Arun)
Overweight
Key drivers of sector outlook
Following sluggish volume in the current fiscal due to higher fuel costs and high
inflation/interest rates, we expect auto volumes to bounce back in CY12/FY13 on
pent-up demand and reversal of the interest-rate/inflation cycle. Despite the current
slowdown, structural uptrend in the industry is intact – driven by an improving
demographic profile, rising disposable income and new launches.
We expect PV/cars as well as LCV segments to register the strongest growth rates
(est. 20%) while two-wheeler sales will likely increase 10% given the relative
penetration. Trucks could maintain a high single-digit growth rate, as reversal of
the interest/inflation-rate cycle compensates for slower IIP growth. Tractors are
expected to maintain double-digit demand growth as wage inflation will remain the
key driver of farm mechanization.
We expect margins to improve slightly on a YoY basis due to: (1) stable
commodity prices, (2) better volumes and operating leverage on resolution of
production issues and pent-up demand, and (3) lower discounts. As a result, we
expect sector profitability and growth to be in double digits.
On valuations, while two wheelers are trading above mid-cycle valuations (though
not stretched), four wheelers’ multiples are below the mid-cycle and have troughed
for some. We, therefore, expect upside from current levels and expect the sector to
perform inline with the market in FY13.
Top Buy: Maruti Suzuki
Our non-consensus call is based on expectations of 45% consol. EPS CAGR
over the next two years, driven by: (1) 25% sales CAGR, and (2) margin
improvement of 250bp.
We expect Maruti’s domestic sales volume to grow 20% annually and regain
market share, on the back of: (1) resolution of labor issues, (2) new products,
and upgrades to existing products, (3) expansion of diesel and CNG offerings,
and (4) entry into utility vehicles.
We believe margins this year will improve, and estimate 250bp expansion during
the forecast period due to: (1) increased localization, (2) price hikes and lower
discounts, (3) better sales mix due to increased contribution from exports and (4)
operating leverage on ramp-up of production, especially of profitable models
such as Swift, Dzire.
We expect premium multiples to be maintained, being a proxy as the only listed
pure-play in the fastest growing segment of passenger vehicles. Price objective
of Rs1,350 is based on early cycle recovery P/E of 15.4x FY13E. The stock
currently trades at 11.9x FY13E earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Automobile (S.Arun)
Overweight
Key drivers of sector outlook
Following sluggish volume in the current fiscal due to higher fuel costs and high
inflation/interest rates, we expect auto volumes to bounce back in CY12/FY13 on
pent-up demand and reversal of the interest-rate/inflation cycle. Despite the current
slowdown, structural uptrend in the industry is intact – driven by an improving
demographic profile, rising disposable income and new launches.
We expect PV/cars as well as LCV segments to register the strongest growth rates
(est. 20%) while two-wheeler sales will likely increase 10% given the relative
penetration. Trucks could maintain a high single-digit growth rate, as reversal of
the interest/inflation-rate cycle compensates for slower IIP growth. Tractors are
expected to maintain double-digit demand growth as wage inflation will remain the
key driver of farm mechanization.
We expect margins to improve slightly on a YoY basis due to: (1) stable
commodity prices, (2) better volumes and operating leverage on resolution of
production issues and pent-up demand, and (3) lower discounts. As a result, we
expect sector profitability and growth to be in double digits.
On valuations, while two wheelers are trading above mid-cycle valuations (though
not stretched), four wheelers’ multiples are below the mid-cycle and have troughed
for some. We, therefore, expect upside from current levels and expect the sector to
perform inline with the market in FY13.
Top Buy: Maruti Suzuki
Our non-consensus call is based on expectations of 45% consol. EPS CAGR
over the next two years, driven by: (1) 25% sales CAGR, and (2) margin
improvement of 250bp.
We expect Maruti’s domestic sales volume to grow 20% annually and regain
market share, on the back of: (1) resolution of labor issues, (2) new products,
and upgrades to existing products, (3) expansion of diesel and CNG offerings,
and (4) entry into utility vehicles.
We believe margins this year will improve, and estimate 250bp expansion during
the forecast period due to: (1) increased localization, (2) price hikes and lower
discounts, (3) better sales mix due to increased contribution from exports and (4)
operating leverage on ramp-up of production, especially of profitable models
such as Swift, Dzire.
We expect premium multiples to be maintained, being a proxy as the only listed
pure-play in the fastest growing segment of passenger vehicles. Price objective
of Rs1,350 is based on early cycle recovery P/E of 15.4x FY13E. The stock
currently trades at 11.9x FY13E earnings.
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