Automobile stocks may gain as domestic demand remains firm

Auto makers continued their robust performance in February on the back of strong domestic demand supported by positive consumer sentiment.

Pre-budget buying to avoid an expected hike of excise duty in Budget 2011 was also partially responsible for last month’s strong performance. Among the bigger firms, Mahindra and Mahindra Ltd (M&M), Hero Honda Motors Ltd and TVS Motor Co. Ltd reported better than expected volumes for February. Overall, growth momentum in sales was maintained. Going forward, however, increase in the fuel price along with higher interest rates may affect their performance.

Tata Motors Ltd reported 11.7% year-on-year (y-o-y) growth in volumes in February, led by 16.3% y-o-y growth in the passenger vehicles (PV) and modest 8.6% y-o-y growth in the commercial vehicles (CV) segments. In the PV segment, the company reported total offtake of 32,169 units, driven by 101.3% y-o-y increase in Tata Nano volumes and 21.6% y-o-y increase in Indigo volumes.

In the CV space, total volumes stood at 45,374 units with the medium and heavy commercial vehicles and light commercial vehicle segments registering 3.8% and 12.4% y-o-y growth, respectively.

Maruti Suzuki India Ltd reported a robust sales clocking volume growth of 15.5% y-o-y to 1,11,645 units led by strong momentum in the domestic market.

During the month, domestic volumes increased 19.8% y-o-y to 101,543 units. However, exports continued the downward trend, posting 15% y-o-y decline to 10,102 units. Maruti Suzuki maintained a strong volume momentum in the A2, A3 and C segments, posting 19.4%, 27.0% and 26.9% y-o-y growth, respectively. The company also launched Kizashi, a luxury sedan in the A4 segment.

M&M registered strong volume growth of 25.4% y-o-y to 52,419 units aided by a robust 36.8% y-o-y growth in tractor sales to 19,041 units and 19.7% y-o-y growth in automotive sales to 33,378 units.

Within the automotive segment, the four-wheeler pickup segment grew 13.4% y-o-y on the back of strong performance by Gio and Maxximo brands. Logan sales continued its upward momentum, registering 114.3% y-o-y growth. The three-wheeler segment registered 57.2% y-o-y growth.

Two- and three-wheelers

Bajaj Auto Ltd reported 21.7% y-o-y growth in line with our estimates, with motorcycle sales registering a growth of 22.2% y-o-y and three-wheeler sales posting better-than-ex-pected 18.4% y-o-y growth as a result of ease in capacity constraints. Hero Honda Motors registered a slightly better-than-expected 23.5% y-o-y growth in sales to 472,055 units, led by a refreshedproduct range and vehicle launches. TVS Motor Co. reported marginally better-than-expected 24.3% y-o-y sales growth led by an impressive 49.3% y-o-y growth in scooter sales.

Outlook

We remain positive on the Indian auto sector. Overall, we estimate auto volumes to register 13% compounded annual growth rate over FY10-12 aided by an improved business environment for the sector. Over the long term, comparatively low penetration levels, a healthy economic environment and favourable demographics supported by higher per capita income levels are likely to help auto makers in sustaining their revenue growth.