India Autos
Margin expansion to drive profit growth
Key takeaways
Revenue growth decent. Auto volumes in most segments were under
pressure in 3QFY14, with the weak continuing to struggle. In four wheelers,
CVs registered a decline of >25%, while PVs were marginally negative yoy.
Two wheelers were the better performing segment due to a lower base as well
as sustained scooter demand. A robust performance at JLR would result in
the sector revenues growing 17.2% yoy and 7.3% qoq.
EBITDA margin improvement. A period of heavy discounting and slump
in demand has led the top two CV companies to record low single-digit
EBITDA margins in ytd FY14. For Tata Motors, however, the trigger is
sustained sales growth and robust EBITDA margins at JLR, which would
render the losses at India operations irrelevant. Hero MotoCorp. and Bajaj
Auto are faring much better, with the latter’s performance also being boosted
by higher export realizations. Among the PV companies, M&M has been able
to compensate for the slowdown in UV sales with robust performance in the
lower realization but higher profitability in tractors. MSIL has had margin
recovery on a favourable rate in imports and absence of labour strife this year.
As a result, despite CV companies dragging down sector margins, yoy
improvement in the other companies would lead to the auto sector’s
EBITDA margins improving 246bps yoy. Our profit growth expectation is
46.5% in 3Q (ex Tata Motors, it is 17.5%).
Our take. The sector valuations normally suffer during periods of weak
demand. However, the current valuations are at a significant premium to
historical averages and appear to ignore the weak underlying demand (except
in Tata Motors, where domestic demand is not a factor). Other stocks like
Hero MotoCorp., Maruti Suzuki, and Ashok Leyland are trading at significant
premium to fair valuations. Top picks. M&M, on a favourable tractor cycle,
subsidiaries adding substantial value to the SOTP and bottoming out of UV
demand. On a long-term perspective, Tata Motors and Wabco India look
good. Among others, we like Bajaj Auto and Motherson Sumi Systems
��
Margin expansion to drive profit growth
Key takeaways
Revenue growth decent. Auto volumes in most segments were under
pressure in 3QFY14, with the weak continuing to struggle. In four wheelers,
CVs registered a decline of >25%, while PVs were marginally negative yoy.
Two wheelers were the better performing segment due to a lower base as well
as sustained scooter demand. A robust performance at JLR would result in
the sector revenues growing 17.2% yoy and 7.3% qoq.
EBITDA margin improvement. A period of heavy discounting and slump
in demand has led the top two CV companies to record low single-digit
EBITDA margins in ytd FY14. For Tata Motors, however, the trigger is
sustained sales growth and robust EBITDA margins at JLR, which would
render the losses at India operations irrelevant. Hero MotoCorp. and Bajaj
Auto are faring much better, with the latter’s performance also being boosted
by higher export realizations. Among the PV companies, M&M has been able
to compensate for the slowdown in UV sales with robust performance in the
lower realization but higher profitability in tractors. MSIL has had margin
recovery on a favourable rate in imports and absence of labour strife this year.
As a result, despite CV companies dragging down sector margins, yoy
improvement in the other companies would lead to the auto sector’s
EBITDA margins improving 246bps yoy. Our profit growth expectation is
46.5% in 3Q (ex Tata Motors, it is 17.5%).
Our take. The sector valuations normally suffer during periods of weak
demand. However, the current valuations are at a significant premium to
historical averages and appear to ignore the weak underlying demand (except
in Tata Motors, where domestic demand is not a factor). Other stocks like
Hero MotoCorp., Maruti Suzuki, and Ashok Leyland are trading at significant
premium to fair valuations. Top picks. M&M, on a favourable tractor cycle,
subsidiaries adding substantial value to the SOTP and bottoming out of UV
demand. On a long-term perspective, Tata Motors and Wabco India look
good. Among others, we like Bajaj Auto and Motherson Sumi Systems
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