Healthy growth in auto sector

Against the backdrop of the likely easing of interest rates, demand revival for four-wheelers is expected

Automobile sales surged at a brisk pace in March 2012 with passenger vehicles (PV) reporting healthy growth aided by pre-budget buying in anticipation of excise duty hike in Union Budget 2012-13. The light commercial vehicle (LCV) segment sustained its strong momentum. However, tractor and two-wheeler demand was hit by slowdown in rural markets.

Among auto majors, Tata Motors Ltd and Mahindra and Mahindra Ltd (M&M, automotive division) reported better-than-expected volume growth; however, TVS Motor Co. Ltd and Bajaj Auto Ltd registered weak performance during the month.

Going ahead, while we expect LCV sales to sustain their growth momentum, two-wheeler and tractor segments are expected to continue reporting moderate volumes. We also expect revival in PV sales to continue with the likely easing of interest rates going ahead.

Tata Motors registered a strong 20.5% year-on-year (y-o-y) increase (9% month-on-month or m-o-m) in total sales, which came in slightly ahead of our estimates. Growth was driven by better-than-expected growth in the CV and PV segments. The CV segment grew 12.8% y-o-y (10.3% m-o-m), driven by impressive 29.5% y-o-y (8.9% m-o-m) growth in the LCV segment. In the PV segment, Nano volumes jumped by 20% y-o-y, while Indica sales grew by a robust 65%, led by strong demand for diesel models.

Maruti Suzuki reported in-line growth of 3.3% y-o-y (5.9% m-o-m) in total volumes to 125,952 units, driven by strong growth in the recently launched Swift and Dzire volumes. Additionally, pre-budget buying by consumers in anticipation of excise duty hike and availability of additional diesel engines benefited the company’s performance. While domestic volumes increased 2.1% y-o-y (4.7% m-o-m) to 112,724 units, exports recorded a strong 14.7% y-o-y (17.1% m-o-m) growth to 13,228 units.

M&M reported healthy 12.3% y-o-y (10.3% m-o-m) growth in total volumes to 64,406 units, driven by strong performance by the automotive segment, which grew by 25.3% y-o-y (9.1% m-o-m). Growth in the automotive segment continued to be driven by strong volume traction in the four-wheeler pick-up and UV segments. However, the tractor segment registered a decline of 12.3% y-o-y as demand in domestic markets (sales down 15% y-o-y) continued to remain sluggish.

Two-wheelers and three-wheelers: Bajaj Auto reported lower-than-expected volume growth of 9% y-o-y (down 2.4% m-o-m) on account of sluggish performance in the three-wheeler and exports markets. Hero MotoCorp Ltd registered modest growth of 2.4% y-o-y (flat m-o-m), mainly due to high growth of last year and general weakness in the two-wheeler segment. TVS Motor continued its poor run, reporting a 4.5% y-o-y (up 6.1% m-o-m) decline in total volumes on account of dismal performance across all product segments (except mopeds), particularly in the motorcycle segment.

Outlook: We believe long-term structural growth drivers of the Indian automobile industry such as gross domestic product (GDP) growth rate (leading to increasing affluence of rural and urban consumers), favourable demographics, low penetration levels, entry of global firms and easy availability of finance are intact, which should support a 13-14% compounded annual growth rate (CAGR) in auto volumes over FY12-14 estimated.

As such, we prefer stocks that have strong fundamentals, high exposure to rural and exports markets and command superior pricing power. Against the backdrop of the likely easing of interest rates, we expect demand revival in the four-wheeler segment. Hence, we remain positive on Ashok Leyland Ltd, M&M and Tata Motors.