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UPDATE
We met 26 Auto dealers across players across cars, UVs, tractors, 2-w and CVs, and some vendors and financiers in the regions of Gujarat (covered Surat, Ahmedabad, Baroda, Vapi, Navsari and Silvassa), Maharashtra (Pune and Mumbai) and Chennai to gauge the demand environment at the ground level. The demand momentum has tapered down further in passenger cars post the festive season with (i) 30-40% drop in inquiries and 10-15% drop in conversion rate, (ii) inventories up by 1-1.5 weeks, and (iii) discounts up by 1-1.5%. This is in contrast to our last dealer survey in Sep’11 when demand scenario especially in Gujarat was robust across auto segments. Car segment continues to reel under pressures from weak consumer sentiment, and discretionary nature of demand for the product (buyers tend to defer purchases in times of uncertainties). MHCV demand has also weakened led by subdued industrial activity and moderating port traffic (declining exports of iron ore on account of mining ban and costlier imports). Financiers have witnessed initial signs of slowdown in MHCVs in the form of rising inventory levels across OEMs, higher discounts, delay in EMI payments by truck operators and falling freight rates on select routes, especially towards South and Kolkata.
LCV, tractors and 2-w demand has remained largely stable, with initial signs of slight moderation in 2-w demand. LCVs and tractors remain strong led by strong rural economy and diverse application – LCVs are used as people mover, for haulage of goods and vegetables, organised retail, last mile transportation and short distance routes, while tractors are used for agri and construction related activities. 2-w have witnessed down trading (preference for low ticket bikes), especially in urban markets.
Demand in Gujarat had held up till date led by state’s robust GDP growth, strong rural economy (good crop, rising MSPs, healthy level of farm mechanisation) and spurt in real estate prices. However, with one of India’s most prosperous states witnessing initial signs of demand moderation (and not slowdown!), we remain cautious on the growth outlook across auto segments, with increased caution on passenger vehicles and MHCVs. We expect demand pressures on cars and MHCVs to spill over to early FY13. Most OEM dealers have confirmed price hike of 2-3% in Jan’12.
We assign higher probability of Auto pack NOT outperforming the broader indices in the near term, as the sector faces multiple headwinds in the form of moderating demand environment and unfavourable forex. Nonetheless, we remain positive on the sector with a medium to long term perspective. We prefer OEMs with pricing power, healthy scope for margin expansion/protection and leadership in relatively immune auto segments. Our top picks among large caps are TTMT (led by continued strong volume traction at JLR led by new launches and increased focus on emerging economies) and BJAUT (2-w demand remains healthy, most profitable OEM and reasonable valuation). We like TVSL among midcap autos, as we believe it provides scope for margin expansion led by improving mix and operating leverage, in addition to our preference for 2-w. The stock is trading at 7x FY13E and we believe it deserves better valuation. We remain cautious on MSIL, AL and HMCL, led by margin concerns (relatively weak pricing power, adverse mix, split related expenses and forex exposure in case of MSIL; macro concerns in case of AL), and rich valuation (in case of HMCL).
Following are the segment wise key takeaways:
2-w There are initial signs of demand moderation (no slowdown though!), evident from downtrading (preference for low ticket bikes) as buyers focus more on initial cost of ownership. Though, dealers reiterate that there has been virtually no impact of (i) rising interest rates as only 35% of bikes are financed (large part of financing is in urban markets, while rural sales are largely on cash) and (ii) fuel prices as 2-w has much higher fuel efficiency as compared to other modes of transportation. Also low ticket size of a 2-w as compared to other auto segments and its relatively non-discretionary nature makes it less vulnerable to economic cycles (YTDFY12 growth of 16%; expectation of 13-14% growth in FY12). Dealers indicated that inventory levels are back to normal levels after dip in festive season, while there are hardly any discounts across models across players. In fact, Honda Activa continues to sell at premium of ~10%, despite waiting period coming down to 2-3 months (against 6-8 months earlier), post increase in capacity. Vendor feedback also suggests order schedules from OEMs factoring in 12-15% growth.
MHCVs Our channel checks indicate deterioration in demand sentiment for MHCVs over the past 2 months, with inventory build up at dealer level across players and also discounts going up from 3-4% earlier to 8-10%. Freight rates on select routes have dipped or remained flattish over the past one month. In addition, port traffic (estimated to contribute ~25% of overall MHCV goods demand), which has held up MHCV demand (MHCV demand up 13% YTDFY12 despite weak IIP nos.) has started tapering off led by mining ban impacting iron ore exports and INR depreciation making imports costlier. Financiers are seeing initial signs of pain with delay of 15-20 days in EMI payments by truck operators. However, neither of the financiers we interacted has seen any defaults as yet, but few of them have become increasingly cautious and anticipate NPA levels to go up in the next 3 months. Industry participants expect flat to marginally negative MHCV growth for the remaining 4 months of FY12. They expect demand pressures to spill over to Q1FY13 as well.
LCVs LCVs continue to be the strongest auto segment, led by strong demand momentum in SCVs (small commercial vehicles – sub-1 tonne category). SCV demand is driven by its wide application (application varies from being used as people mover in rural areas to transportation of vegetables, fruits, etc. and any other short distance transportation; it is also used for organised retail in urban areas and last mile distribution). This wide application makes LCVs relatively less exposed to the economic cycles, especially when macro variables like IIP growth, industrial activity, interest rates and fuel prices are getting unfavourable. Order schedules from OEMs have been robust, especially for sub-1 tonne vehicles (Tata Ace and Mahindra Maximmo). Industry participants expect LCVs to grow at 20-25% YoY for the remaining 4 months of FY12 (YTD growth of 31%).
Passenger cars There is clear divide between petrol and diesel variants, with petrol cars inventory levels having gone up by 7-10 days to 7-8 weeks in the past one month, while waiting period for diesel models continues at 3-4 months. Discounts on petrol cars are up 1.5-2%, while dealers confirmed that most OEMs have indicated their willingness to raise prices by 2-3% in Jan’12 to counter costlier raw material imports on INR depreciation. We believe this to be counter intuitive (higher discounts and expected price hike) and expect discounts to go up further (in case of price hike in Jan’12) to sustain the already weak demand environment.
Tractors Tractor demand remains strong led by strong rural economy. Cash purchases are on the rise with 25% of tractor sales (up from ~10% in FY09), reflecting strong farm incomes. Tractor portfolios of NBFCs and private financiers have been one of the better performing portfolios, while pain is evident in case of PSUs (~25% share in tractor financing). Order schedules from most OEMs suggest healthy demand environment going forward
Following are the dealer wise key takeaways:
Tata Motors/Fiat Demand for cars and MHCVs was strong till Diwali; however it has started feeling the pinch in Dec’11 with walkins/telephonic inquiries falling considerably. Also, with Kamurta (inauspicious period from Dec 15 to Jan 14) setting in in Gujarat, no significant improvement in demand is expected. Slowing down port traffic (falling iron ore exports led by mining ban and depreciating INR making imports costlier) has impacted MHCV demand. LCV demand remains strong on robust rural economy and wide application. Inventory levels are up by 1-2 weeks, while discounts are up 1-1.5%. Tata Motors has taken price hike of Rs5k-10k in Nov’11 across its diesel/petrol models except Manza and Nano. Walkins/telephonic inquiries have dropped by 30-40% post Diwali, with conversion rate at 10%. Dealer margin on TTMT vehicles is 3-3.5%, while on Fiat vehicles is 4-4.5%. Fiat will launch two new models one each in compact and sedan segments; however, no clarity on launch date was given. Despite a cautious stance on MHCV and cars in India business, we reiterate our positive outlook on TTMT led by expectations of continued traction in JLR volumes and margin remaining largely stable and reasonable valuation (6.8x FY13E).
Maruti Suzuki Dealers indicated that car demand (especially petrol versions) has deteriorated post Diwali with inquiries dropping 15-20% and conversion rate falling 5-10%. Discounts on petrol cars are up ~1.5%, while inventory levels are up by 7-10 days. Swift has waiting period of 8 months and has seen ~15% order cancellations. They indicated that vehicle prices may go up marginally in Jan’12. We reiterate our REDUCE on MSIL, led by expectations of continued weak demand environment and margin pressures (limited pricing power and forex exposure).
Mahindra & Mahindra Demand remains robust across M&M UVs and tractors led by strong rural economy, brand equity and wide distribution network. Bolero pick up is M&M’s most selling CV, followed by Maximmo (USPs being fuel economy and low maintenance) and is primarily used for transportation of agri products/vegetables/fruits, wood, short distance haulage, among others in rural areas. Genio cab volumes are gradually picking up; however, there is clear preference for Bolero pick up. Pick up market has strong brand loyalty, where M&M scores strongly. Dealers indicated that Bolero pick up has waiting period of 3 months, with no discounts while its competitor Tata 207 sells at discount of Rs30k. In the sub-1 tonne category, Tata Ace continues to rule the roost led by first mover advantage. Typical buyer profile for M&M UVs is: Scorpio and Bolero are largely private, while Xylo is 40% commercial. Typical replacement cycle for pickups is 5 years, while for 3-w is 4 years. M&M pays 2.5-3% dealer margin, while a dealer earns 20-25% margin on spares, 15-17% on oil. Maintain BUY on M&M, led by large exposure to relatively immune rural economy and continued strong volume performance in both UVs and tractors. However, we would keep a close eye on the margin performance in the coming quarters.
Hyundai/General Motors There is a clear divide between demand for petrol and diesel variants, with diesel vehicles commanding waiting period of 3-4 months, while there is an inventory pile up in petrol cars. Model wise – Verna diesel has a waiting period of 8 months, while i20 diesel 3 months. Beat diesel has waiting period of 45 days, while Tavera diesel has 2-3 months waiting. GM in collaboration with SAIC is looking to launch 4 new products in 2012/13 – (i) new hatchback/sedan (1200-1300 cc); (ii) Van in competition to Maruti Eeco; (iii) SUV in competition with Innova and (iv) New Captiva. Hyundai’s launch pipeline in 2012 is as follows: (i) Avante – sedan in the price range of Rs10-12 lacs, pitted against Skoda Rapid/Chevrolet Cruze; (ii) Upgraded Sonata. Eon has not picked up as expected largely led by higher pricing, low power and driveability issues. Hyundai has started giving free insurance (worth Rs10k) on Eon in Dec’11.However, dealers sounded confident of Eon sales picking up once market sentiment improves. 70% of Tavera usage is commercial. Dealers indicated that there will be price hike of 2-3% on both GM and Hyundai in Jan’12.
Ford Volumes have dropped by 25-30% post Diwali. Conversion rate stood at 22% with very high conversion rate for Figo and lowest for new Fiesta. Inventory has gone up by 1 week to 35-40 days. Ford will launch new lower end Endeavour (pitted against Mahindra XUV5oo) in Feb-Mar’12 likely to be priced at Rs1.2-1.3 mn. Figo has 93-95% localisation, while new Fiesta has 70-75%. Dealers indicated that Ford will raise vehicle prices by 3% in Jan’12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UPDATE
We met 26 Auto dealers across players across cars, UVs, tractors, 2-w and CVs, and some vendors and financiers in the regions of Gujarat (covered Surat, Ahmedabad, Baroda, Vapi, Navsari and Silvassa), Maharashtra (Pune and Mumbai) and Chennai to gauge the demand environment at the ground level. The demand momentum has tapered down further in passenger cars post the festive season with (i) 30-40% drop in inquiries and 10-15% drop in conversion rate, (ii) inventories up by 1-1.5 weeks, and (iii) discounts up by 1-1.5%. This is in contrast to our last dealer survey in Sep’11 when demand scenario especially in Gujarat was robust across auto segments. Car segment continues to reel under pressures from weak consumer sentiment, and discretionary nature of demand for the product (buyers tend to defer purchases in times of uncertainties). MHCV demand has also weakened led by subdued industrial activity and moderating port traffic (declining exports of iron ore on account of mining ban and costlier imports). Financiers have witnessed initial signs of slowdown in MHCVs in the form of rising inventory levels across OEMs, higher discounts, delay in EMI payments by truck operators and falling freight rates on select routes, especially towards South and Kolkata.
LCV, tractors and 2-w demand has remained largely stable, with initial signs of slight moderation in 2-w demand. LCVs and tractors remain strong led by strong rural economy and diverse application – LCVs are used as people mover, for haulage of goods and vegetables, organised retail, last mile transportation and short distance routes, while tractors are used for agri and construction related activities. 2-w have witnessed down trading (preference for low ticket bikes), especially in urban markets.
Demand in Gujarat had held up till date led by state’s robust GDP growth, strong rural economy (good crop, rising MSPs, healthy level of farm mechanisation) and spurt in real estate prices. However, with one of India’s most prosperous states witnessing initial signs of demand moderation (and not slowdown!), we remain cautious on the growth outlook across auto segments, with increased caution on passenger vehicles and MHCVs. We expect demand pressures on cars and MHCVs to spill over to early FY13. Most OEM dealers have confirmed price hike of 2-3% in Jan’12.
We assign higher probability of Auto pack NOT outperforming the broader indices in the near term, as the sector faces multiple headwinds in the form of moderating demand environment and unfavourable forex. Nonetheless, we remain positive on the sector with a medium to long term perspective. We prefer OEMs with pricing power, healthy scope for margin expansion/protection and leadership in relatively immune auto segments. Our top picks among large caps are TTMT (led by continued strong volume traction at JLR led by new launches and increased focus on emerging economies) and BJAUT (2-w demand remains healthy, most profitable OEM and reasonable valuation). We like TVSL among midcap autos, as we believe it provides scope for margin expansion led by improving mix and operating leverage, in addition to our preference for 2-w. The stock is trading at 7x FY13E and we believe it deserves better valuation. We remain cautious on MSIL, AL and HMCL, led by margin concerns (relatively weak pricing power, adverse mix, split related expenses and forex exposure in case of MSIL; macro concerns in case of AL), and rich valuation (in case of HMCL).
Following are the segment wise key takeaways:
2-w There are initial signs of demand moderation (no slowdown though!), evident from downtrading (preference for low ticket bikes) as buyers focus more on initial cost of ownership. Though, dealers reiterate that there has been virtually no impact of (i) rising interest rates as only 35% of bikes are financed (large part of financing is in urban markets, while rural sales are largely on cash) and (ii) fuel prices as 2-w has much higher fuel efficiency as compared to other modes of transportation. Also low ticket size of a 2-w as compared to other auto segments and its relatively non-discretionary nature makes it less vulnerable to economic cycles (YTDFY12 growth of 16%; expectation of 13-14% growth in FY12). Dealers indicated that inventory levels are back to normal levels after dip in festive season, while there are hardly any discounts across models across players. In fact, Honda Activa continues to sell at premium of ~10%, despite waiting period coming down to 2-3 months (against 6-8 months earlier), post increase in capacity. Vendor feedback also suggests order schedules from OEMs factoring in 12-15% growth.
MHCVs Our channel checks indicate deterioration in demand sentiment for MHCVs over the past 2 months, with inventory build up at dealer level across players and also discounts going up from 3-4% earlier to 8-10%. Freight rates on select routes have dipped or remained flattish over the past one month. In addition, port traffic (estimated to contribute ~25% of overall MHCV goods demand), which has held up MHCV demand (MHCV demand up 13% YTDFY12 despite weak IIP nos.) has started tapering off led by mining ban impacting iron ore exports and INR depreciation making imports costlier. Financiers are seeing initial signs of pain with delay of 15-20 days in EMI payments by truck operators. However, neither of the financiers we interacted has seen any defaults as yet, but few of them have become increasingly cautious and anticipate NPA levels to go up in the next 3 months. Industry participants expect flat to marginally negative MHCV growth for the remaining 4 months of FY12. They expect demand pressures to spill over to Q1FY13 as well.
LCVs LCVs continue to be the strongest auto segment, led by strong demand momentum in SCVs (small commercial vehicles – sub-1 tonne category). SCV demand is driven by its wide application (application varies from being used as people mover in rural areas to transportation of vegetables, fruits, etc. and any other short distance transportation; it is also used for organised retail in urban areas and last mile distribution). This wide application makes LCVs relatively less exposed to the economic cycles, especially when macro variables like IIP growth, industrial activity, interest rates and fuel prices are getting unfavourable. Order schedules from OEMs have been robust, especially for sub-1 tonne vehicles (Tata Ace and Mahindra Maximmo). Industry participants expect LCVs to grow at 20-25% YoY for the remaining 4 months of FY12 (YTD growth of 31%).
Passenger cars There is clear divide between petrol and diesel variants, with petrol cars inventory levels having gone up by 7-10 days to 7-8 weeks in the past one month, while waiting period for diesel models continues at 3-4 months. Discounts on petrol cars are up 1.5-2%, while dealers confirmed that most OEMs have indicated their willingness to raise prices by 2-3% in Jan’12 to counter costlier raw material imports on INR depreciation. We believe this to be counter intuitive (higher discounts and expected price hike) and expect discounts to go up further (in case of price hike in Jan’12) to sustain the already weak demand environment.
Tractors Tractor demand remains strong led by strong rural economy. Cash purchases are on the rise with 25% of tractor sales (up from ~10% in FY09), reflecting strong farm incomes. Tractor portfolios of NBFCs and private financiers have been one of the better performing portfolios, while pain is evident in case of PSUs (~25% share in tractor financing). Order schedules from most OEMs suggest healthy demand environment going forward
Following are the dealer wise key takeaways:
Tata Motors/Fiat Demand for cars and MHCVs was strong till Diwali; however it has started feeling the pinch in Dec’11 with walkins/telephonic inquiries falling considerably. Also, with Kamurta (inauspicious period from Dec 15 to Jan 14) setting in in Gujarat, no significant improvement in demand is expected. Slowing down port traffic (falling iron ore exports led by mining ban and depreciating INR making imports costlier) has impacted MHCV demand. LCV demand remains strong on robust rural economy and wide application. Inventory levels are up by 1-2 weeks, while discounts are up 1-1.5%. Tata Motors has taken price hike of Rs5k-10k in Nov’11 across its diesel/petrol models except Manza and Nano. Walkins/telephonic inquiries have dropped by 30-40% post Diwali, with conversion rate at 10%. Dealer margin on TTMT vehicles is 3-3.5%, while on Fiat vehicles is 4-4.5%. Fiat will launch two new models one each in compact and sedan segments; however, no clarity on launch date was given. Despite a cautious stance on MHCV and cars in India business, we reiterate our positive outlook on TTMT led by expectations of continued traction in JLR volumes and margin remaining largely stable and reasonable valuation (6.8x FY13E).
Maruti Suzuki Dealers indicated that car demand (especially petrol versions) has deteriorated post Diwali with inquiries dropping 15-20% and conversion rate falling 5-10%. Discounts on petrol cars are up ~1.5%, while inventory levels are up by 7-10 days. Swift has waiting period of 8 months and has seen ~15% order cancellations. They indicated that vehicle prices may go up marginally in Jan’12. We reiterate our REDUCE on MSIL, led by expectations of continued weak demand environment and margin pressures (limited pricing power and forex exposure).
Mahindra & Mahindra Demand remains robust across M&M UVs and tractors led by strong rural economy, brand equity and wide distribution network. Bolero pick up is M&M’s most selling CV, followed by Maximmo (USPs being fuel economy and low maintenance) and is primarily used for transportation of agri products/vegetables/fruits, wood, short distance haulage, among others in rural areas. Genio cab volumes are gradually picking up; however, there is clear preference for Bolero pick up. Pick up market has strong brand loyalty, where M&M scores strongly. Dealers indicated that Bolero pick up has waiting period of 3 months, with no discounts while its competitor Tata 207 sells at discount of Rs30k. In the sub-1 tonne category, Tata Ace continues to rule the roost led by first mover advantage. Typical buyer profile for M&M UVs is: Scorpio and Bolero are largely private, while Xylo is 40% commercial. Typical replacement cycle for pickups is 5 years, while for 3-w is 4 years. M&M pays 2.5-3% dealer margin, while a dealer earns 20-25% margin on spares, 15-17% on oil. Maintain BUY on M&M, led by large exposure to relatively immune rural economy and continued strong volume performance in both UVs and tractors. However, we would keep a close eye on the margin performance in the coming quarters.
Hyundai/General Motors There is a clear divide between demand for petrol and diesel variants, with diesel vehicles commanding waiting period of 3-4 months, while there is an inventory pile up in petrol cars. Model wise – Verna diesel has a waiting period of 8 months, while i20 diesel 3 months. Beat diesel has waiting period of 45 days, while Tavera diesel has 2-3 months waiting. GM in collaboration with SAIC is looking to launch 4 new products in 2012/13 – (i) new hatchback/sedan (1200-1300 cc); (ii) Van in competition to Maruti Eeco; (iii) SUV in competition with Innova and (iv) New Captiva. Hyundai’s launch pipeline in 2012 is as follows: (i) Avante – sedan in the price range of Rs10-12 lacs, pitted against Skoda Rapid/Chevrolet Cruze; (ii) Upgraded Sonata. Eon has not picked up as expected largely led by higher pricing, low power and driveability issues. Hyundai has started giving free insurance (worth Rs10k) on Eon in Dec’11.However, dealers sounded confident of Eon sales picking up once market sentiment improves. 70% of Tavera usage is commercial. Dealers indicated that there will be price hike of 2-3% on both GM and Hyundai in Jan’12.
Ford Volumes have dropped by 25-30% post Diwali. Conversion rate stood at 22% with very high conversion rate for Figo and lowest for new Fiesta. Inventory has gone up by 1 week to 35-40 days. Ford will launch new lower end Endeavour (pitted against Mahindra XUV5oo) in Feb-Mar’12 likely to be priced at Rs1.2-1.3 mn. Figo has 93-95% localisation, while new Fiesta has 70-75%. Dealers indicated that Ford will raise vehicle prices by 3% in Jan’12.
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