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Automobiles
Despite moderation in volumes, we expect price hikes taken by the
companies in the last one year to help them post decent growth in
revenues for the quarter (except Maruti Suzuki). However, adverse foreign
currency movements (USD and yen against the Indian rupee) are likely to
negate the benefits that could have accrued from softening in raw
material costs. With standalone margin and Jaguar Land Rover volumes
holding the potential to surprise on the positive side, we highlight Tata
Motors as our preferred pick in the upcoming results season.
While volumes in the quarter continued to witness moderation across
categories (light commercial vehicles and two wheelers performed better
compared to heavy commercial vehicles and passenger cars), price hikes taken by
the automobile companies in the last one year to offset the increase in input costs
should help revenue growth. Amongst automobile companies, while we expect
Bajaj Auto and Hero MotoCorp to benefit from the decent growth in two wheeler
volumes during the quarter, Ashok Leyland’s revenue growth will likely be helped
by low base volumes of 3QFY11. Similarly, while Tata Motors is expected to
benefit from strong volume numbers from Jaguar Land Rover (JLR) in recent
months, the strike at its Manesar plant and severe slowdown in the passenger car
segment would impact Maruti Suzuki. Consequently, we expect Maruti Suzuki to
post 22% YoY decline in revenues. Amongst auto ancillary stocks, we expect Exide
Industries to benefit from strong demand for two wheeler batteries and uptick in
inverter battery demand. Apollo Tyres’ topline, on the other hand, is expected to
benefit from significant price hikes taken by the company in the last one year.
Adverse foreign currency movement to keep margins under check: While
input costs witnessed softening in 3QFY12, adverse foreign currency movements
(appreciation of US$ and yen v/s rupee) is expected to take away most of the
benefits. This, however, is likely to benefit Bajaj Auto, which derives nearly 30% of
its revenues from exports. While, we expect QoQ improvement in margin for most
of the companies, YoY margins are expected to witness significant decline for
Maruti Suzuki (low volumes, high discounts and adverse yen movement), Tata
Motors (adverse exchange movement in JLR and low margin in standalone
business), Exide Industries (price cuts plus high costs lead inventory for a part of
the quarter) and Apollo Tyres (high cost rubber inventory for a part of the quarter).
Preparing for upcoming results
We have downgraded our estimates for Bajaj Auto, Hero MotoCorp (due to
softening in domestic motorcycle demand), Maruti Suzuki (lower-than-expected
volumes) and Exide (softening in replacement demand and lower-than-expected
margin). We have upgraded our estimates for Tata Motors on the back of
continued volume surprises at JLR. At the net earnings level, Ashok Leyland (192%)
and Hero MotoCorp (49%) are expected to post the strongest YoY growth rates
largely due to base effect. Maruti Suzuki, however, is expected to post the weakest
YoY trend in net earnings (YoY decline of 50%).
Ambit v/s consensus
Based on the limited consensus data for 3QFY12, our estimates are ahead of
consensus for Maruti Suzuki, Tata Motors, Exide and Apollo Tyres and largely in
line with consensus estimates for Bajaj Auto, Hero MotoCorp and Ashok Leyland.
Recommendation
We highlight Tata Motors as our top pick in the auto sector. With the domestic
passenger car segment witnessing a revival of sorts in the last two months, the
standalone business margin may surprise us and consensus positively in the
results. Similarly with strong demand from Emerging Markets (such as China) and
for Range Rover Evoque, JLR volumes can also surprise on the positive side.
3QFY12 Results Preview
Ambit Capital Pvt Ltd 12
Bajaj Auto (BJAUT IN, mcap US$7996 mn, BUY, TP `1,740, 17%
upside)
Why are we revising our estimates?
Bajaj Auto’s volumes for December 2011 at 10% YoY were below our
expectations. While exports continued to be strong growing at the rate of 25%
YoY, domestic volumes (motorcycles and exports) at 3% YoY were below
expectations. Further, the management has cut down its FY2012 volume estimates
from earlier 4.5mn units to 4.4mn units now, largely on account of lower–thanexpected
sales of domestic motorcycles.
While the domestic two wheeler volumes for the month of December 2011 were
below expectations, we had expected moderation in the volumes going into
2HFY12. We had expected YoY growth of 13% for the industry compared with 17%
for 1HFY12. However, the quantum of moderation has been higher than our
expectation. To factor in these disappointments, we had cut down our volume
estimates for FY2012 by 3% and for FY2013 by 4%. Our revised volume estimates
now stand at 4.4 mn units for FY2012 and 4.9mn units for FY2013. However,
given the strong growth in export volumes as well as better-than-expected mix
(higher share of three wheeler vehicles) and rupee appreciation v/s US$ should
help negate the impact of moderation in domestic motorcycles volumes at the net
earnings level. Overall, our net earnings estimates for FY2012 and FY2013 now
stand revised downwards by 1% and 3% respectively.
Valuations: Based on our DCF model (assuming WACC of 13.6% and a terminal
growth rate of 4%), we value Bajaj Auto at a one-year forward valuation of `1,740
(compared to our earlier one-year forward valuation estimate of `1,840) implying
FY13 P/E of 14.5x. We maintain our BUY recommendation on the stock.
Hero MotoCorp (HMCL IN, mcap US$6572 mn, SELL, TP `1,900,
7% upside)
Why are we revising our estimates?
Hero MotoCorp’s December volumes at 540,276 units (8% YoY growth) saw
significant moderation from earlier levels (April to November 2011 YoY growth of
20%. (Break-up is not available in respect of separate growth rates for
motorcycles, scooters and exports in the month of December 2011.)
While the domestic two wheeler volumes for the month of December 2011 were
below expectations, we had expected moderation in the volumes going into
2HFY12. We had expected YoY growth of 13% for industry compared to 17% for
1HFY12. However, the pace of moderation has been higher than our expectation.
Further, specific to Hero MotoCorp, we believe the growth rates have been
impacted to some extent by growing competition from the erstwhile joint venture
partner, Honda Motorcycles & Scooters India (HMSI saw YoY growth of 36% in
December 2011 volumes). To factor in these recent developments, we had cut
down our FY2012 and FY2013 volume estimates by 2% and 4% respectively. Over
a longer term, we believe Hero MotoCorp faces structural risks to volumes as well
as margins arising from competition and transition challenges post separation
from Honda.
Valuation: Based on our DCF model (assuming WACC of 13.5% and a terminal
growth rate of 4%), we value Hero MotoCorp at one-year forward valuation of
`1,900 (compared to our earlier one-year forward valuation estimate of `2,050)
implying FY13 P/E of 14.5x. We maintain our SELL recommendation on the stock
3QFY12 Results Preview
Ambit Capital Pvt Ltd 13
Maruti Suzuki (MSIL IN, mcap US$5205mn, SELL, TP `1,000, 5%
upside)
Why are we revising our estimates?
Maruti Suzuki's domestic volumes for the month of December 2011 at 92,161
units saw a decline of 7% YoY. While domestic volumes were weak witnessing a
decline of 13% YoY, export volumes at 14,686 saw strong growth of 51% YoY.
While Maruti Suzuki's despatches for the month of December 2011 may have been
impacted to some extent on account of planned shutdowns, the YoY growth
(decline of 7%) was below our expectation (we had expected mid-single digit
growth) since the base of December 2010, too, had a planned shutdown of five
days. Maruti Suzuki continues to underperform other car makers (Tata Motors,
Hyundai Motors and Mahindra & Mahindra saw YoY growth rates of 47%, 13%
and 24% in the passenger car/utility vehicle segment for December 2011) on
account of rising competition and its petrol dominated portfolio (75% of total
volumes). We have downgraded our volume estimates for FY2012 by 12% and for
FY2013 by 7%. Further, we expect margins to remain under pressure on account
of significant appreciation in the yen, rising competition and the impact of labour
strikes. We have downgraded FY2012 and FY2013 EBITDA margin by 152bps and
33bps respectively (a significant part of margin estimates is also after factoring in
the much lower-than-expected 2QFY12 margin). Overall, our revised net earnings
stand downgraded by 29% for FY2012 and by 8% for FY2013.
Valuation: Based on our DCF model (assuming WACC of 14% and a terminal
growth rate of 3%), we value Maruti Suzuki at a one-year forward valuation of
`1,000 (compared to our earlier one-year forward valuation estimate of `1,150)
implying FY13 P/E of 12x. We maintain our SELL recommendation on the stock.
3QFY12 Results Preview
Ambit Capital Pvt Ltd 14
Tata Motors (TTMT IN, mcap US$11312 mn, BUY, TP `220, 8%
upside)
Why are we revising our estimates?
Tata Motors’ domestic passenger vehicle growth at 47% YoY for December 2011
came in much ahead of our expectations. Further, Jaguar Land Rover (JLR)
volumes continued to surprise positively with November 2011 volumes witnessing
a growth of 27% YoY.
With Emerging Markets, particularly China, continuing to witness strong growth in
volumes as well as a strong response to the newly launched Range Rover Evoque,
we have upgraded our JLR volumes estimates by 4% for FY2012 to 290,000 and
for FY2013 to 310,000 units. Overall, we have upgraded FY2012and FY2013 net
earnings by 4%.
Valuation: Based on our DCF model (assuming WACC of 15% and a terminal
growth rate of 3%), we value Tata Motors’ standalone business at one-year
forward valuation of `65 implying FY13 P/E of 12x. We value the JLR business,
using WACC of 15% and terminal growth rate of 3%, at `133. We value other
subsidiaries/equity investments of Tata Motors at `22 to arrive at a SOTP-based
fair value of `220/share. We maintain our BUY recommendation on the stock.
Exide Industries (EXID IN, mcap US$1855mn, BUY, TP `140, 22%
upside)
Why are we revising our estimates?
Exide Industries’ 2QFY12 were significantly below our expectations particularly on
the margin front. 2QFY12 EBITDA margin at 7.7% was below our expectations by
a significant 996bps largely on account of gross margin disappointment. The
management attributed the margin disappointment to a double whammy impact
of price cuts together with the high cost inventory during the quarter.
We have cut down our estimates for FY2012 and FY2013 to factor in the 2QFY12
disappointments and lower-than-expected sales of the four-wheeler replacement
batteries. Overall we cut down our FY2012 net earnings by 30% and FY2013 net
earnings by 17%. However, we believe margins to improve sequentially in 3QFY12
on the back of softening in lead prices as well as uptick in the sales of higher
margin inverter batteries.
Valuation: Based on our DCF model (assuming WACC of 14% and a terminal
growth rate of 4%), we value Exide Industries’ core standalone business at a oneyear
forward valuation of `128 implying FY13 P/E of 16x, which is in line with the
four-year average P/E. This, together with `12 for other businesses (mainly captive
smelters and stake in ING Vysya Life Insurance) yields an SOTP value of `140
(compared to our earlier estimate of `164). We maintain our BUY
recommendation on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Automobiles
Despite moderation in volumes, we expect price hikes taken by the
companies in the last one year to help them post decent growth in
revenues for the quarter (except Maruti Suzuki). However, adverse foreign
currency movements (USD and yen against the Indian rupee) are likely to
negate the benefits that could have accrued from softening in raw
material costs. With standalone margin and Jaguar Land Rover volumes
holding the potential to surprise on the positive side, we highlight Tata
Motors as our preferred pick in the upcoming results season.
While volumes in the quarter continued to witness moderation across
categories (light commercial vehicles and two wheelers performed better
compared to heavy commercial vehicles and passenger cars), price hikes taken by
the automobile companies in the last one year to offset the increase in input costs
should help revenue growth. Amongst automobile companies, while we expect
Bajaj Auto and Hero MotoCorp to benefit from the decent growth in two wheeler
volumes during the quarter, Ashok Leyland’s revenue growth will likely be helped
by low base volumes of 3QFY11. Similarly, while Tata Motors is expected to
benefit from strong volume numbers from Jaguar Land Rover (JLR) in recent
months, the strike at its Manesar plant and severe slowdown in the passenger car
segment would impact Maruti Suzuki. Consequently, we expect Maruti Suzuki to
post 22% YoY decline in revenues. Amongst auto ancillary stocks, we expect Exide
Industries to benefit from strong demand for two wheeler batteries and uptick in
inverter battery demand. Apollo Tyres’ topline, on the other hand, is expected to
benefit from significant price hikes taken by the company in the last one year.
Adverse foreign currency movement to keep margins under check: While
input costs witnessed softening in 3QFY12, adverse foreign currency movements
(appreciation of US$ and yen v/s rupee) is expected to take away most of the
benefits. This, however, is likely to benefit Bajaj Auto, which derives nearly 30% of
its revenues from exports. While, we expect QoQ improvement in margin for most
of the companies, YoY margins are expected to witness significant decline for
Maruti Suzuki (low volumes, high discounts and adverse yen movement), Tata
Motors (adverse exchange movement in JLR and low margin in standalone
business), Exide Industries (price cuts plus high costs lead inventory for a part of
the quarter) and Apollo Tyres (high cost rubber inventory for a part of the quarter).
Preparing for upcoming results
We have downgraded our estimates for Bajaj Auto, Hero MotoCorp (due to
softening in domestic motorcycle demand), Maruti Suzuki (lower-than-expected
volumes) and Exide (softening in replacement demand and lower-than-expected
margin). We have upgraded our estimates for Tata Motors on the back of
continued volume surprises at JLR. At the net earnings level, Ashok Leyland (192%)
and Hero MotoCorp (49%) are expected to post the strongest YoY growth rates
largely due to base effect. Maruti Suzuki, however, is expected to post the weakest
YoY trend in net earnings (YoY decline of 50%).
Ambit v/s consensus
Based on the limited consensus data for 3QFY12, our estimates are ahead of
consensus for Maruti Suzuki, Tata Motors, Exide and Apollo Tyres and largely in
line with consensus estimates for Bajaj Auto, Hero MotoCorp and Ashok Leyland.
Recommendation
We highlight Tata Motors as our top pick in the auto sector. With the domestic
passenger car segment witnessing a revival of sorts in the last two months, the
standalone business margin may surprise us and consensus positively in the
results. Similarly with strong demand from Emerging Markets (such as China) and
for Range Rover Evoque, JLR volumes can also surprise on the positive side.
3QFY12 Results Preview
Ambit Capital Pvt Ltd 12
Bajaj Auto (BJAUT IN, mcap US$7996 mn, BUY, TP `1,740, 17%
upside)
Why are we revising our estimates?
Bajaj Auto’s volumes for December 2011 at 10% YoY were below our
expectations. While exports continued to be strong growing at the rate of 25%
YoY, domestic volumes (motorcycles and exports) at 3% YoY were below
expectations. Further, the management has cut down its FY2012 volume estimates
from earlier 4.5mn units to 4.4mn units now, largely on account of lower–thanexpected
sales of domestic motorcycles.
While the domestic two wheeler volumes for the month of December 2011 were
below expectations, we had expected moderation in the volumes going into
2HFY12. We had expected YoY growth of 13% for the industry compared with 17%
for 1HFY12. However, the quantum of moderation has been higher than our
expectation. To factor in these disappointments, we had cut down our volume
estimates for FY2012 by 3% and for FY2013 by 4%. Our revised volume estimates
now stand at 4.4 mn units for FY2012 and 4.9mn units for FY2013. However,
given the strong growth in export volumes as well as better-than-expected mix
(higher share of three wheeler vehicles) and rupee appreciation v/s US$ should
help negate the impact of moderation in domestic motorcycles volumes at the net
earnings level. Overall, our net earnings estimates for FY2012 and FY2013 now
stand revised downwards by 1% and 3% respectively.
Valuations: Based on our DCF model (assuming WACC of 13.6% and a terminal
growth rate of 4%), we value Bajaj Auto at a one-year forward valuation of `1,740
(compared to our earlier one-year forward valuation estimate of `1,840) implying
FY13 P/E of 14.5x. We maintain our BUY recommendation on the stock.
Hero MotoCorp (HMCL IN, mcap US$6572 mn, SELL, TP `1,900,
7% upside)
Why are we revising our estimates?
Hero MotoCorp’s December volumes at 540,276 units (8% YoY growth) saw
significant moderation from earlier levels (April to November 2011 YoY growth of
20%. (Break-up is not available in respect of separate growth rates for
motorcycles, scooters and exports in the month of December 2011.)
While the domestic two wheeler volumes for the month of December 2011 were
below expectations, we had expected moderation in the volumes going into
2HFY12. We had expected YoY growth of 13% for industry compared to 17% for
1HFY12. However, the pace of moderation has been higher than our expectation.
Further, specific to Hero MotoCorp, we believe the growth rates have been
impacted to some extent by growing competition from the erstwhile joint venture
partner, Honda Motorcycles & Scooters India (HMSI saw YoY growth of 36% in
December 2011 volumes). To factor in these recent developments, we had cut
down our FY2012 and FY2013 volume estimates by 2% and 4% respectively. Over
a longer term, we believe Hero MotoCorp faces structural risks to volumes as well
as margins arising from competition and transition challenges post separation
from Honda.
Valuation: Based on our DCF model (assuming WACC of 13.5% and a terminal
growth rate of 4%), we value Hero MotoCorp at one-year forward valuation of
`1,900 (compared to our earlier one-year forward valuation estimate of `2,050)
implying FY13 P/E of 14.5x. We maintain our SELL recommendation on the stock
3QFY12 Results Preview
Ambit Capital Pvt Ltd 13
Maruti Suzuki (MSIL IN, mcap US$5205mn, SELL, TP `1,000, 5%
upside)
Why are we revising our estimates?
Maruti Suzuki's domestic volumes for the month of December 2011 at 92,161
units saw a decline of 7% YoY. While domestic volumes were weak witnessing a
decline of 13% YoY, export volumes at 14,686 saw strong growth of 51% YoY.
While Maruti Suzuki's despatches for the month of December 2011 may have been
impacted to some extent on account of planned shutdowns, the YoY growth
(decline of 7%) was below our expectation (we had expected mid-single digit
growth) since the base of December 2010, too, had a planned shutdown of five
days. Maruti Suzuki continues to underperform other car makers (Tata Motors,
Hyundai Motors and Mahindra & Mahindra saw YoY growth rates of 47%, 13%
and 24% in the passenger car/utility vehicle segment for December 2011) on
account of rising competition and its petrol dominated portfolio (75% of total
volumes). We have downgraded our volume estimates for FY2012 by 12% and for
FY2013 by 7%. Further, we expect margins to remain under pressure on account
of significant appreciation in the yen, rising competition and the impact of labour
strikes. We have downgraded FY2012 and FY2013 EBITDA margin by 152bps and
33bps respectively (a significant part of margin estimates is also after factoring in
the much lower-than-expected 2QFY12 margin). Overall, our revised net earnings
stand downgraded by 29% for FY2012 and by 8% for FY2013.
Valuation: Based on our DCF model (assuming WACC of 14% and a terminal
growth rate of 3%), we value Maruti Suzuki at a one-year forward valuation of
`1,000 (compared to our earlier one-year forward valuation estimate of `1,150)
implying FY13 P/E of 12x. We maintain our SELL recommendation on the stock.
3QFY12 Results Preview
Ambit Capital Pvt Ltd 14
Tata Motors (TTMT IN, mcap US$11312 mn, BUY, TP `220, 8%
upside)
Why are we revising our estimates?
Tata Motors’ domestic passenger vehicle growth at 47% YoY for December 2011
came in much ahead of our expectations. Further, Jaguar Land Rover (JLR)
volumes continued to surprise positively with November 2011 volumes witnessing
a growth of 27% YoY.
With Emerging Markets, particularly China, continuing to witness strong growth in
volumes as well as a strong response to the newly launched Range Rover Evoque,
we have upgraded our JLR volumes estimates by 4% for FY2012 to 290,000 and
for FY2013 to 310,000 units. Overall, we have upgraded FY2012and FY2013 net
earnings by 4%.
Valuation: Based on our DCF model (assuming WACC of 15% and a terminal
growth rate of 3%), we value Tata Motors’ standalone business at one-year
forward valuation of `65 implying FY13 P/E of 12x. We value the JLR business,
using WACC of 15% and terminal growth rate of 3%, at `133. We value other
subsidiaries/equity investments of Tata Motors at `22 to arrive at a SOTP-based
fair value of `220/share. We maintain our BUY recommendation on the stock.
Exide Industries (EXID IN, mcap US$1855mn, BUY, TP `140, 22%
upside)
Why are we revising our estimates?
Exide Industries’ 2QFY12 were significantly below our expectations particularly on
the margin front. 2QFY12 EBITDA margin at 7.7% was below our expectations by
a significant 996bps largely on account of gross margin disappointment. The
management attributed the margin disappointment to a double whammy impact
of price cuts together with the high cost inventory during the quarter.
We have cut down our estimates for FY2012 and FY2013 to factor in the 2QFY12
disappointments and lower-than-expected sales of the four-wheeler replacement
batteries. Overall we cut down our FY2012 net earnings by 30% and FY2013 net
earnings by 17%. However, we believe margins to improve sequentially in 3QFY12
on the back of softening in lead prices as well as uptick in the sales of higher
margin inverter batteries.
Valuation: Based on our DCF model (assuming WACC of 14% and a terminal
growth rate of 4%), we value Exide Industries’ core standalone business at a oneyear
forward valuation of `128 implying FY13 P/E of 16x, which is in line with the
four-year average P/E. This, together with `12 for other businesses (mainly captive
smelters and stake in ING Vysya Life Insurance) yields an SOTP value of `140
(compared to our earlier estimate of `164). We maintain our BUY
recommendation on the stock.
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