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Indian Auto Sector Update

Contributed by Angel Broking

By Angel Broking

Auto Sales continued the robust momentum in February 2010 as well and touched record highs on the back of positive consumer sentiment and partially due to pre-ponement of buying at dealers’ desk in anticipation of roll back of Excise duty in the Union Budget. Volumes of most players showed no signs of tapering off and recorded healthy growth for the month. The Commercial Vehicle (CV) Segment dominated the growth in February 2010 led by the Medium & Heavy Commercial Vehicle (M&HCV) Segment, as the domestic recovery was affirmed by the overall pick up in economic and industrial activities. The Passenger Vehicle (PV) Segment also continued on growth path following new launches and a confident consumer in the market. The Two-Wheeler Segment too maintained its growth momentum. Going ahead, we expect the demand to be strong, albeit more normalised across segments, considering demand may have peaked in the past few months prior to the expected price hikes post the Excise Duty hike and spurt in Raw Material prices.

- Maruti Suzuki (Maruti) recorded a robust 22% yoy growth registering highest ever monthly volumes at 96,650 units (79,190). The company’s Exports consolidated at an expected run-rate of 11,800 units reflecting the effect of the discontinuation of scrappage norms in Europe. Management is positive about Eeco, which gave a boost to its C Segment resulting in 39.6% yoy growth. The PV Segment grew by 20.5% yoy. However, the MUV Segment declined 46.7% yoy.

- Mahindra & Mahindra (M&M) reported healthy volumes at 41,814 units (29,017) led by growth in the Tractor Segment at 52.6% yoy supplemented by the 40.2% yoy growth registered by the Automotive Division. Growth of the Automotive Segment was led by the Utility Vehicles (UV), Light Commercial Vehicles (LCV) and Three-wheeler Segments at 24.2%, 89.8% and 102.3% yoy, respectively. The company performed exceptionally well on the Exports front, growing at around 284.9% yoy. Management is extremely confident of the continuation of the growth in demand as the Budget increased allocation to Rural Development programmes in turn particularly benefitting the Farm Equipment Segment of M&M.

- Tata Motors (TML) reported a robust 57.8% yoy growth in total volumes, with the M&HCV Segment leading the growth at 91.3% yoy, followed by the LCV Segment growing at 55.5% yoy. Exports also boosted the company's performance as it reported 124.5% yoy growth partially on account of a low base resulting from the downturn in FY2009. Passenger cars also showed healthy growth of 49.5% yoy on the back of new launches such as Manza clocking volumes.

- Two- and Three-Wheelers: Hero Honda (HH) reported strong growth registering 16.1% yoy growth for the month and 4.2mn units YTD thereby exceeding management’s expectations of ending FY2010 with estimated sales of 4mn units. Bajaj Auto (BAL) led the pack with a striking 74.7% yoy growth with its key brands, Pulsar and Discover, performing well during the month. TVS Motor (TVS) clocked 31.0% yoy growth with its Scooter and Moped Segments registering decent growth for the month.

Tata Motors

- TML registered a 57.8% yoy growth in Total sales to 69,149 units (43,811) in February 2010.

- The CV Segment recorded its highest ever volumes with the M&HCV Segment registering a robust yoy growth of 91.3%.

- Indica sales were at 11,502 units, the highest this fiscal; Indigo recorded sales of 7,373 units, the highest since its launch in 2002 and yoy growth of 75.2%.

- The Sumo/Safari/Xenon XT range accounted for stellar sales of 4,005 units, a growth of 14% yoy.

- The PV Segment reported a healthy 43.1% yoy growth, with the Nano selling 4,105 units.

Maruti Suzuki

- Maruti registered record Sales in February 2010, registering a robust 22.0% yoy growth to 96,650 units (79,190).

- The A2 Segment grew by 20% yoy; C Segment sales hiked by 39.6% yoy on the launch of its new offering Eeco.

- The company’s Exports consolidated at a run-rate of around 11,000-12,000 units, due to discontinuation of scrappage norms in Europe in December 2009, registering yoy growth of 38.8%.

- To circumvent the capacity constraints faced by the company in the past months, the Board of Directors have approved capacity expansion at Manesar, which will entail capex of around Rs1,700cr, leading to additional capacity of 250,000 cars per annum in addition to the current 1million car capacity. The additional capacity will begin commercial production by April 2012.

Mahindra & Mahindra

- M&M reported healthy monthly sales, with a growth of 44.1% yoy to 41,814 units (29,017).

- The Tractor Segment grew by a healthy 52.6% yoy, aided by a strong 219.7% yoy growth in Tractor Exports.

- The Automotive Segment grew by a strong 40.2% yoy growth led by growth of 102.3% in the domestic Three-Wheeler Segment coupled by the robust 338% yoy growth registered by the Auto-Export Segment.

- The UV (including the XYLO, the Bolero and Pick-Ups) and LCV Segments reported yoy growth of 24.2% and 89.8%, respectively.

- Management is extremely confident of the continuation of the growth in demand as the Budget increased allocation to Rural Development programmes in turn particularly benefitting M&M’s Farm Equipment Segment.

Bajaj Auto

- BAL reported an overall Sales growth of 74.7% yoy to 268,678 units (153,782)

- The Motorcycle Segment grew 78% yoy and has been led by its two game-changer brands, Pulsar and Discover, which clocked robust volumes of around 65,000 units and 90,000 units respectively, and supplemented by Platina and Boxer sales at around 45,000 units and 35,000 units, respectively.

- The Scooter Segment de-grew by 85.7% to 87units (608).

- The Three-wheeler Segment reported a healthy 58.8% yoy growth to 33,968 units (21,389), with the RE600 goods carrier exhibiting strong growth in February 2010.

- Management aims to expand capacity to 300,000 units per month by April 2010 in response to stellar demand for Pulsar and Discover.

Hero Honda

- HH sold 382,096 units (329,055), registering a healthy growth of 16.1% yoy, despite a high base effect of February 2009.

- The company reported growth across segments, with the Basic 100cc, 150cc segment in the Motorcycle Segment, and Pleasure growing in the Scooter Segment at an average 16,000 units per month.

- Management has guided for 2 new product launches in the Motorcycle Segment in the next two months, which will augur well for the company.

- HH crossed its landmark 4mn units for FY2010 in February 2010.

TVS Motor

- TVS clocked 31.0% yoy growth to 140,544 units (107,301).

- Domestic sales grew by 33.4% yoy to 124,470 units (93,301).

- The Scooter Segment recorded a 38.3% yoy growth to 27,017 units (19,532).

- The Motorcycle Segment grew by a 27.7% yoy to 63,394 units (49,659).

- Exports grew by 15.4% to 19,141 units (16,583).

- The recently launched TVS Jive (launched in Tamil Nadu) and the TVS Wega are expected to be launched pan-India beginning March 2010 and augment monthly volumes by 15-20%.

Outlook

We remain positive on the Indian Auto Sector. We estimate overall Auto Volumes to register a growth of around 18% yoy and 10% yoy in FY2010E and FY2011E, respectively, aided by the improved economic environment for the sector. Over the longer term, comparatively low penetration levels, a healthy economic environment, and favourable demographics, supported by higher per-capita income levels, are likely to help the Auto companies in sustaining their Top-line growth.

The recent Union Budget 2010-11 came in better than expected for the Automobile Sector, with the government keen on increasing its tax base and the Budget hiking Excise Duty by 2% to 10% (from 8% earlier). The industry was however, expecting a duty hike of 4%. Moreover, broad measures like thrust on rural, infrastructure and road development would also aid the Auto Sector in clocking consumption-based growth in volumes.

On the bourses, most Auto stocks registered a sharp run up in the post Budget rally and outperformed the broader indices. Among the pack, we continue to maintain our Overweight stance on Maruti Suzuki, M&M and Tata Motors.