Auto Monthly | January 2015 | Subdued performance :: IndiaNivesh

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Highlights of the month  Auto companies showed subdued performance in the month of January 2015 impacted by excise duty roll back; PV and M&HCV recorded sound growth while pressure was witnessed in 2W and 3W sales. LCV continue to show poor performance while strong recovery was seen in M&HCV sales.  In Passenger car segment, Tata Motors and Maruti Suzuki performed well, recorded 19% and 8% YoY growth respectively.  In two wheelers segment, TVS and Hero Motocorp witnessed muted performance. Bajaj Auto is still struggling to increase volume in domestic market due to slowdown in premium segment bike, 4% growth in export volume partially offsetting lower domestic volume.  In the commercial vehicle segment LCV sales continued to show weakness while M&HCV sales showed some sign of recovery led by better freight movement in agri, consumer durables and autos, housing construction material (in tier I-II cities).  We believe the positive outlook is more or less captured in consensus. the recent rally in the auto sector has led to most companies trading at above or near their fair valuations, based on one-year forward multiples. Considering these, we keep neutral stance on the sector. Outlook  We believe there would be a short term impact of Excise roll back (2 to 3 months perspective) on auto sales. However, lower fuel prices, lower interest rate and improving GDP should aid the recovery in automotive industry. We believe good governance and faster reform would lead to higher employment/ disposable income that will improve consumer sentiment.  Overall, we expect CVs to record the highest recovery on the back of low base and the highest correlation to the macro improvement. We expect CV volumes to increase above 20% YoY in FY16. In PVs, we expect an improvement in consumer sentiment to aid 15% YoY growth in FY16 and FY17. Similarly, for 2Ws, we expect 12% YoY growth in FY16 and FY17. Within 2Ws, we expect scooters to outpace motorcycles.  We expect domestic passenger vehicle (PV) demand to bounce back in FY16 and deliver 15% CAGR over FY15-17 on the back of improving consumer sentiment (due to economic revival) and moderating fuel costs and interest rates. One feature of the demand slowdown over the last 2-3 years has been the sharp decline in the proportion of entry segment car sales from 30% in FY11 to 24% in FY14. Despite first-time buyers returning in the last 6-8 months, the share of entry level cars has continued to slide (21% share in YTD FY15). We expect growth for premium and compacts cars to remain strong, driven by new launches.  In the commercial vehicle segment LCV sales continued to show weakness while M&HCV sales showed some sign of recovery led by an increase in the replacement of old trucks (particularly by the large fleet operators) and to the low base effect.  We believe this positive outlook is more or less captured in consensus. The recent rally in the auto sector stocks has led to most companies trading at above or near their fair valuations, based on one-year forward multiples. Considering these, we keep neutral stance on the sector.  Top Picks: Bajaj Auto, Exide, Swaraj Engines and Lumax Auto Technologies.

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