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India: Automobiles
Equity Research
State of the cycle check – identifying defensives in a downcycle
Cycle continues to weaken – insights from bottom of the last cycle
We believe the key drivers of Indian auto demand cycle continue to show
signs of worsening amid persistent 10-year high inflation and rising rates.
1) Our comparison with the 2008 cyclical trough period indicates that
stocks such as Hero Honda which outperformed during the cyclical trough
showed the following characteristics: a) P/E valuation at a significant
discount to historical average (vs sector at premium), and b) industryleading margins, implying higher earnings resilience in our view.
2) We find that auto stocks in our coverage are currently trading closer to
historical averages, with the exceptions of Bosch India and Bajaj Auto.
These two players also enjoy high industry leading margins, driven by a
well-differentiated product offering and a high focus on cash returns.
3) Hero Honda is currently trading at a significant 19% premium to its
historical average in our analysis, in contrast to the March 2008 period,
when it traded at a 18% discount. It has also lost its margin leadership to
Bajaj Auto over last few quarters, and faces significant headwinds on
branding and technology after Honda’s exit, in our view.
Bosch India – characteristics of a defensive consumer stock, CL Buy
We like Bosch India for its: a) high stability in margins and cash returns
across the cycle due to its well-differentiated technology driven industry
position; b) lowest stock beta and covariance in P/E multiple relative to the
sector; and c) in the near term, Bosch India is also likely to benefit from the
relative demand differential between petrol vs diesel fuel-based vehicles.
Bajaj Auto – strategic transformation drives margin leadership, Buy
We believe Bajaj Auto’s strategy and cash returns are structurally different
than during the last downcycle, driven by: a) a repositioned product
portfolio that relies less on weaker brands, and b) well-executed exports
and technology strategy to drive higher share of global motorcycle market.
Hero Honda – margin volatility could drive valuation derating, Sell
Hero Honda is currently trading at premium to historical average on P/E,
EV/EBITDA, and EV/IC valuations. We believe higher margin volatility
during 2010-11 could reduce investor confidence on longer-term earnings.
Key risks: Higher/lower than expected demand, inflation, and price
competition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Automobiles
Equity Research
State of the cycle check – identifying defensives in a downcycle
Cycle continues to weaken – insights from bottom of the last cycle
We believe the key drivers of Indian auto demand cycle continue to show
signs of worsening amid persistent 10-year high inflation and rising rates.
1) Our comparison with the 2008 cyclical trough period indicates that
stocks such as Hero Honda which outperformed during the cyclical trough
showed the following characteristics: a) P/E valuation at a significant
discount to historical average (vs sector at premium), and b) industryleading margins, implying higher earnings resilience in our view.
2) We find that auto stocks in our coverage are currently trading closer to
historical averages, with the exceptions of Bosch India and Bajaj Auto.
These two players also enjoy high industry leading margins, driven by a
well-differentiated product offering and a high focus on cash returns.
3) Hero Honda is currently trading at a significant 19% premium to its
historical average in our analysis, in contrast to the March 2008 period,
when it traded at a 18% discount. It has also lost its margin leadership to
Bajaj Auto over last few quarters, and faces significant headwinds on
branding and technology after Honda’s exit, in our view.
Bosch India – characteristics of a defensive consumer stock, CL Buy
We like Bosch India for its: a) high stability in margins and cash returns
across the cycle due to its well-differentiated technology driven industry
position; b) lowest stock beta and covariance in P/E multiple relative to the
sector; and c) in the near term, Bosch India is also likely to benefit from the
relative demand differential between petrol vs diesel fuel-based vehicles.
Bajaj Auto – strategic transformation drives margin leadership, Buy
We believe Bajaj Auto’s strategy and cash returns are structurally different
than during the last downcycle, driven by: a) a repositioned product
portfolio that relies less on weaker brands, and b) well-executed exports
and technology strategy to drive higher share of global motorcycle market.
Hero Honda – margin volatility could drive valuation derating, Sell
Hero Honda is currently trading at premium to historical average on P/E,
EV/EBITDA, and EV/IC valuations. We believe higher margin volatility
during 2010-11 could reduce investor confidence on longer-term earnings.
Key risks: Higher/lower than expected demand, inflation, and price
competition.
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