INDIA AUTO GRAPH - IDBI Bank€¦ · INDIA AUTO GRAPH Analyst: Bhaumik Bhatia +91-22-4322 1189 [email protected] A mixed bag! May 2012. Review and outlook Auto volumes

INDIA AUTO GRAPH

Analyst: Bhaumik Bhatia +91-22-4322 1189

[email protected]

A mixed bag!May 2012

Review and outlook Auto volumes for May’12 were largely in line with estimates across players, with negative surprise coming from Tata Motors MHCVs and positive

surprise from HMCL.

Demand for 2-w remained muted for TVS, however HMCL saw healthy growth. Dealers continue to offer discounts and freebies to push sales,especially in case of slow moving models in bikes and scooters.

In cars, demand for diesel models remained strong while that for petrol remained subdued led by rising fuel costs and credit cost. Maruti continued tobenefit from diesel versions of recent launches of D’zire, Swift and Ertiga, while its petrol models continue to reel under pressure. TataIndica/Nano/Indigo were stable aided by diesel options in Indica/Indigo.

UVs and LCVs remained fairly strong for both M&M and Tata Motors led by new/refreshed launches and stable demand for diesel vehicles. Also, orderschedules from OEMs have been robust especially for Tata Ace. However, MHCVs were weak, especially for Tata Motors led by macro concerns,pressures on truck operator profitability and recent price hikes. We believe that LCVs will continue their strong growth trajectory, led by demand inSCVs (small commercial vehicles – sub-1 tonne category) and relatively less exposure to economic cycles.

Tractors were flattish for M&M. This could be initial signs of inventory correction being over at the company’s end, with production back to normallevels after cut in Mar’ 12. However, our channel checks and interactions with tractor OEMs suggest demand weakness to continue in the near term.

Overall, we expect Auto sector volumes to remain under pressure in the near term as June quarter has been weak historically, barring diesel cars, UVsand SCVs.

Monthly snapshot

Company May-12 May-11 YoY (%) Apr-12 MoM (%)

Hero Honda 556,644 500,234 11.3 549,555 1.3

Bajaj Auto 352,219 358,849 (1.8) 381,590 (7.7)

TVS Motor 176,012 185,931 (5.3) 174,455 0.9

Maruti 98,884 104,073 (5.0) 100,415 (1.5)

M&M 63,004 53,215 18.4 57,516 9.5

Tata Motors 64,347 62,296 3.3 60,086 7.1

Ashok Leyland 8,648 5,725 51.1 8,686 (0.4)

Hyundai 55,670 47,762 16.6 54,606 1.9

Ford 7,729 9,057 (14.7) 9,569 (19.2)

General Motors 6,079 8,329 (27.0) 8,005 (24.1)

Suzuki 36,746 30,222 21.6 30,635 19.9

Honda 10,334 2,334 342.8 7,075 46.1

Toyota 15,501 7,470 107.5 14,378 7.8

HMSI 221,540 145,729 52.0 198,831 11.4

Nissan 3,138 1,588 97.6 4,757 (34.0)

2

Prefer Tata Motors, Bajaj Auto

Peer comparison

3

We assign higher probability of Auto pack NOT outperforming the broader indices in the near term, as the sector faces multipleheadwinds. Nonetheless, we remain positive on the sector with a medium to long term perspective.

Our top picks among large caps are Tata Motors (led by continued strong volume traction and stable margin at JLR led by newlaunches and increased focus on emerging economies) and Bajaj Auto (diversified geography mix, stable profitability andgreater product pipeline visibility). Key downside risks to our call would be sudden slowdown in JLR volumes/significantslowdown in domestic volumes (neither of which events we assign high probability to) in case of Tata Motors and sharpslowdown in 3-w/exports (again unlikely, in our view) in case of Bajaj Auto.

We remain cautious on Maruti led by uncertainties on volumes (in case of petrol variants which form ~70% of its volumes) andmargin (relatively weak pricing power, and forex fluctuations). We are cautious on Hero MotoCorp led by weak domesticdemand environment (~95% of volumes) and Honda’s increased aggression in HMCL’s bread-n-butter executive segment. Keyupside risks to our call would be sharp revival in petrol vehicle demand/favourable forex in case of Maruti and improveddomestic demand/faster than expected exports rampup in case of HMCL. We also note that both the stock have correctedsignificantly, thereby factoring in most negatives and we don’t foresee any significant downside from these levels. At the sametime any material uptick is also unlikely given the above mentioned factors.

CMP

Mkt cap Target Revenue EPS (Rs) P/E (x) EV/EBITDA (x)

Rs mn (Rs) Reco (Rs mn) price (Rs) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Ashok Leyland 25 ACCUMULATE 66,251 29 126,421 148,879 2.3 2.7 10.9 9.2 7.9 6.8

Bajaj Auto 1,500 ACCUMULATE 433,906 1,657 198,112 220,231 108.6 110.4 13.8 13.6 9.5 8.5

Tata Motors 225 BUY 663,559 309 1,656,545 1,989,481 45.6 42.6 4.9 5.3 4.0 3.1

Hero MotoCorp 1,822 REDUCE 363,811 1,955 235,790 269,446 119.1 139.6 15.3 13.0 12.0 9.6

Maruti Suzuki 1,074 REDUCE 310,261 1,257 359,703 447,230 57.9 89.8 18.5 12.0 8.8 5.5

M&M 645 HOLD 395,922 690 318,536 369,199 47.1 48.7 13.7 13.2 9.7 8.6

TVS Motor 33 HOLD 15,773 34 71,262 77,657 5.2 5.5 6.3 6.1 4.6 4.0

Escorts* 63 REDUCE 6,638 69 42,860 48,809 9.4 12.5 6.7 5.0 2.6 1.6

* Year ending September 2011/12

Company snapshot

4

HMCL volumes maintained its healthy growth at 556.6k units, up 11%/1% YoY/MoM. We believe volume performance was aided to an extent byMaestro dispatches which has received positive initial response.

Splendor and Passion continue to boost HMCL volumes while Pleasure is likely to have clocked ~40k units. The company has already come out withHero branded Splendor/Passion and other models will follow soon. Full change over to Hero branded models will be done by FY13 end.

Management expects industry to clock 9-10% volume growth in FY13, with HMCL outpacing industry growth (FY13 volumes to exceed 6.8 mn units)and rural demand to outpace urban demand. Inventory levels remain at 3 weeks with retail sales largely tracking wholesale volumes.

HMCL plans to launch 7-8 new models/variants every year. In FY13, it will launch 125cc bike Ignitor and 110cc Passion Xpro.

However HMCL dealers, in our interaction, sounded cautious on demand outlook for HMCL in the coming months especially in the light of recentlylaunched Honda Dream Yuga in May’12.

Hero Motocorp REDUCE

Motorcycles: Sales volume (Nos) Motorcycles: Volume growth (%)

Source: Company; SIAM; IDBI Capital Research Source: Company; SIAM; IDBI Capital Research

(In Units) May-12 May-11 YoY (%) Apr-12 MoM (%) YTDFY13 YTDFY12 YoY (%)

Motorcycles 556,644 500,234 11.3 549,555 1.3 1,106,199 1,017,333 8.7

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Company snapshot (cont’d)

5

Motorcycle sales was marginally up 1%/down 6% YoY/MoM to 322k units largely led by weak domestic environment and downtrading.

3-w sales was lower than estimates, down 26%/23% YoY/MoM to 30.2k units led by virtually no exports to Sri Lanka (as indicatedby the management during Q4 conference call – it exports 10k 3-w and12k 2-w). Management expects 3-w domestic demand toremain under pressure as no new permits are likely to be released in the near term.

Exports were up 3%/down 23% YoY/MoM to 130.6k units. Management expects issues with Sri Lankan exports post import dutyhike to continue over next 2-3 months and impact FY13 exports to the tune of 25k 3-w and 35k 2-w. In addition, Iran has beenweak due to US sanctions.

It expects domestic demand to remain weak (it has seen weakness across regions except some places in North) in H1FY13 with~6% growth expectation in domestic motorcycles. It expects H2 to be better and industry to end FY13 with 10% growth. It haswitnessed inventory build up in case of competition, while for Bajaj Auto, retail = dispatches with inventory of 21 days in 2-w and15-21 days in 3-w. BJAUT is not offering any discounts in the market place.

The company has taken price hike of Rs500 on 2-w in May’12, while no price hike was there on 3-w.

The company has launched Discover 125 ST in May’12 and will start dispatching Pulsar NS200 in June’12. It will launch RE60 4-win Q4Y13. It is banking strongly on Discover 125 ST to boost its volumes.

Bajaj Auto ACCUMULATE


Motorcycles 321,922 317,989 1.2 342,324 (6.0) 664,246 640,224 3.8

Three Wheelers 30,297 40,860 (25.9) 39,266 (22.8) 69,563 85,934 (19.1)

Total Vehicles 352,219 358,849 (1.8) 381,590 (7.7) 733,809 726,158 1.1

Total Exports Sales 130,573 126,818 3.0 169,010 (22.7) 299,583 285,240 5.0

Total Domestic Sales 221,646 232,031 (4.5) 212,580 4.3 434,226 440,918 (1.5)


6


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8

TVS volume was at 176k units, down 5%/up 1% YoY/MoM with motorcycles continuing to face pressure.

3-w continued its downward trend, down 28%/up 1% while 2-w sales were down 5%/up 1% to 173k units.

Motorcycles continued to remain laggard, down 15%/6% YoY/MoM at 64.1k units due to weak industry sentiment, intensifyingcompetition and lack of competitive product offerings. Management expects 2-w industry to grow at 10% in FY13 with initialmonths being subdued. It also expect TVSL to outpace industry growth led by two new motorcycle launches – one in Aug’12 andanother in Jan’13.

Scooters volume was up 2%/down 8% YoY/MoM at 38.8k units. Scooters volume have been impacted post capacity release atHMSI Activa. It plans to launch new scooter in Q4FY13/Q1FY14.

Mopeds sales remained stable, up 3%/4% to 70.1k units.

Exports remained weak down 13%/up 2% to 22.8k units led by inventory destocking mainly in Africa.

TVS Motor HOLD


Motorcycles 64,134 75,619 (15.2) 67,966 (5.6) 132,100 145,192 (9.0)

Scooters 38,833 38,168 1.7 35,833 8.4 74,666 73,242 1.9

Mopeds 70,125 68,104 3.0 67,752 3.5 137,877 127,640 8.0

Three Wheelers 2,920 4,040 (27.7) 2,904 0.6 5,824 7,601 (23.4)

Total Sales 176,012 185,931 (5.3) 174,455 0.9 350,467 353,675 (0.9)


9


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11

Maruti volumes were down 5%/2% YoY/MoM, to 98.9k reflecting continued weak sentiment in the petrol segment, though diesel versions of Swift,D’zire and Ertiga remained robust.

Domestic volumes were down 4.3%/1% to 89.5k units.

Mini segment remained under pressure, down 29%/3% YoY/MoM to 29.9k units. SX4 continued its downward slide, down 85%/36.1% to 405 units.

Exports were down 10.9%/7.4% YoY/MoM to 9.4k units.

Management expects subdued consumer sentiment in petrol cars led by higher fuel costs (with recent petrol price hike), rising cost of credit and concerns on finance availability. Diesel demand remains robust with waiting period of 4-5 months on diesel models of D’zire and Swift.

We reiterate our view based on channel checks that domestic petrol car demand remains under pressure with OEMs trying to woo buyers with hefty discounts, the strategy which has worked only to a limited extent. We expect this trend to continue in the coming months, with petrol vehicle sales lagging diesel vehicle demand significantly.

We don’t see Maruti’s monthly run-rate to significantly improve in the coming months (current capacity at 130k units per month) as, though the diesel variants of Swift, D’zire and Ertiga continue to command waiting periods ranging from 4-6 months, it will remain constrained by diesel engine supply (~400k engines during FY13) and weak petrol demand. Also, the new diesel engine plant with initial capacity of 150k units will come up only in H2FY14.

Key volume surprise could come from faster than expected recovery in petrol demand and quicker ramp up in diesel engine availability (we assign very low probability to the occurrence of these two events).

Maruti Suzuki REDUCE


Mini - M800, Alto, Wagon R, A-star 29,895 42,125 (29.0) 30,720 (2.7) 60,615 83,869 (27.7)

Compact - Swift, Estilo, Ritz 24,290 21,185 14.7 26,072 (6.8) 50,362 39,412 27.8

Super compact - Dzire 17,707 10,812 63.8 15,510 14.2 33,217 22,609 46.9

Mid size - SX4 405 2,702 (85.0) 634 (36.1) 1,039 4,804 (78.4)

Executive - Kizashi 12 50

3 300.0 15 85

Total Domestic Cars 72,309 76,874 (5.9) 72,939 (0.9) 145,248 150,779 (3.7)

Utility vehicles - Gypsy, Vitara 7,734 1,100 603.1 5,593 38.3 13,327 1,317 911.9

Vans - Omni, Eeco 9,435 15,545 (39.3) 11,723 (19.5) 21,158 28,567 (25.9)

Total Domestic MUV's 17,169 16,645 3.1 17,316 (0.8) 34,485 29,884 15.4

Domestic 89,478 93,519 (4.3) 90,255 (0.9) 179,733 180,663 (0.5)

Exports 9,406 10,554 (10.9) 10,160 (7.4) 19,566 20,565 (4.9)

Total Sales 98,884 104,073 (5.0) 100,415 (1.5) 199,299 201,228 (1.0)


12

Mini (M 800, Alto, Wagon R, A -Star): Sales volume (Nos) Mini (M 800, Alto, Wagon R, A -Star): Volume growth (%)

Compact (Swift, Estilo, Ritz and Dzire): Sales volume (Nos) Compact (Swift, Estilo, Ritz and Dzire): Volume growth (%)



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Mid-Size (SX4): Sales volume (Nos) Mid-Size (SX4): Volume growth (%)

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15

M&M’s volumes continued their strong traction in Automotive segment at 43.9k units, up 28%/8% YoY/MoM. UV volumes (including pickups) were up 32%/4% at 33.4k units led by XUV5oo, new Xylo and continued strong demand for Bolero, Scorpio and Maximmo.

Verito sales were weak at 943 units, down 27%/37%.

Automotive exports also remained strong, up 87%/185% to 4k units.

After falling by ~10% during Nov’11-Apr’12, tractor volumes were flattish (we expected dip of 5%) up 1%/ 13% YoY/MoM to 19k units. This could be initial signs of inventory correction being over at the company’s end, with production back to normal levels after cut in Mar’ 12. However, our channel checks and interactions with tractor OEMs suggest demand weakness to continue in the near term and we would wait for couple more months of growth, before forming a positive view on the tractor volumes. Management expects tractor industry to be flat to marginally negative in H1FY13 with ~10% growth in H2. Overall it expects FY13 tractor industry growth at 5% (we estimate flat volumes in FY13). Slowdown in tractors is more from the infra led demand where MM has strong presence.

During FY13, new launches in Automotive segment include mini SUV, sub-4 meter Verito, Rexton, new MPV and Reva NXR (before Diwali) while that in tractors include a new tractor launch and 3-4 refreshes.

M&M HOLD


UVs (incl. pick ups) 33,465 25,369 31.9 32,111 4.2 65,576 49,360 32.9

LCV 1,210 1,001 20.9 1,028 17.7 2,238 1,942 15.2

Verito 943 1,291 (27.0) 1,501 (37.2) 2,444 2,297 6.4

Three Wheelers 4,320 4,498 (4.0) 4,659 (7.3) 8,979 8,909 0.8

Auto Exports 4,050 2,164 87.2 1,420 185.2 5,470 3,905 40.1

Automotive Sales 43,988 34,323 28.2 40,719 8.0 84,707 66,413 27.5

Tractors Domestic 18,019 17,952 0.4 16,049 12.3 34,068 35,692 (4.6)

Tractors Exports 997 940 6.1 748 33.3 1,745 1,730 0.9

Tractors Sales 19,016 18,892 0.7 16,797 13.2 35,813 37,422 (4.3)

Total Sales 63,004 53,215 18.4 57,516 9.5 120,520 103,835 16.1


16

UVs (including pick ups): Sales volume (Nos) UVs (including pick ups): Volume growth (%)

LCV: Sales volume (Nos) LCV: Volume growth (%)



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Verito: Sales volume (Nos) Verito: Volume growth (%)

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Auto Exports: Sales volume (Nos) Auto Exports: Volume growth (%)


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19

TTMT volumes remained subdued, up 3%/7% YoY/MoM to 64.3k units, led largely by weak MHCV volumes.

LCVs were back on track after a weak April (growth of 9%), up 25%/10% YoY/MoM to 27.2k units. MHCVs continued to disappoint with volumes down 20%/up 27%% to 12.4k units – volume decline was higher than our estimate of ~10%.

Based on interactions with various industry participants, we believe that LCVs will continue their strong growth trajectory, led by strong demand in SCVs (small commercial vehicles – sub-3.5 tonne category) and relatively lower exposure to economic cycles. Also, order schedules from OEMs have been robust especially for Tata Ace. We expect continued pressures on MHCV volumes over next 3 months (macro concerns, pressures on truck operator profitability, recent price hikes), further impacted by the traditionally weak June quarter and monsoon for MHCVs.

Passenger cars were up 6%/down 10% to 20.5k units. Indica/Nano/Indigo volumes were stable YoY at 5.5k/8.5k/3.4k units, aided by diesel options in Indica/Indigo range, as car industry continue to reel under demand pressures in petrol segment. UVs remained flat YoY at 3.1k units.

Tata Motors BUY


Domestic - MHCV 12,451 15,532 (19.8) 9,829 26.7 22,280 29,467 (24.4)

Domestic - LCV 27,174 21,829 24.5 24,818 9.5 51,992 44,632 16.5

Domestic CV 39,625 37,361 6.1 34,647 14.4 74,272 74,099 0.2

Domestic - Cars 17,371 16,280 6.7 18,610 (6.7) 35,981 35,824 0.4

Domestic - UVs 3,132 3,121 0.4 4,048 (22.6) 7,180 6,964 3.1

Domestic - PVs 20,503 19,401 5.7 22,658 (9.5) 43,161 42,788 0.9

Exports 4,219 5,534 (23.8) 2,781 51.7 7,000 9,792 (28.5)

Total 64,347 62,296 3.3 60,086 7.1 124,433 126,679 (1.8)


20

Domestic MHCV: Sales volume (Nos) Domestic MHCV: Volume growth (%)

Domestic Cars: Sales volume (Nos) Domestic Cars: Volume growth (%)



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Domestic UVs: Sales volume (Nos) Domestic UVs: Volume growth (%)


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CV sales (excl Dost) were relatively strong up 11%/down 2% YoY/MoM, at 6.3k units.

Our interactions with dealers indicate that demand will remain weak in the MHCV segment over the next 5-6 months due to macro concerns, pressures on truck operator profitability, recent price hikes and traditionally weak period for MHCV demand.

SCV segment (Dost) built on its strong momentum with volumes of 2.3k units in May‘12.

Management expects domestic MHCV industry growth at 4-6% in FY13. It has seen demand for tractor trailers and multi axles tapering down.

Ashok Leyland ACCUMULATE

Total Sales volume (Nos) Total Sales Volume growth (%)


Commercial Vehicles - excl SCV (Dost) 6,343 5,725 10.8 6,468 (1.9) 12,811 11,268 13.7

SCV (Dost) 2,305 - 2,218 3.9 4,523 -

Total Sales 8,648 5,725 51.1 8,686 (0.4) 17,334 11,268 53.8

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Raw material price trends – Steel, aluminium trending up

23

After rising for the past two months, bothaluminium and steel prices are down 6% and14% MoM respectively. Rubber was also down2% MoM. However, depreciating rupee willrestrict the pass on of declining commoditycosts. In the light of moderating demandenvironment and consequent impact on pricingpower, we expect margin pressures on AutoOEMs to continue going forward.

Aluminium - LME ($/tonne) Steel Billets - LME ($/tonne)

Rubber - RSS-4 (Rs/kg)

Source: Rubber Board

Source: Bloomberg Source: Bloomberg

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Jan

-12

Feb-1

2

Mar-

12

May-1

2

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Dealing (91-22) 6637 1150 [email protected]

Key to RatingsStocks:BUY: Absolute return of 15% and above; ACCUMULATE: 5% to 15%; HOLD: Upto ±5%; REDUCE: -5% to -15%; SELL: -15% and below.

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