Monday, January 11, 2010

Pre- earning sector wise analysis: Automobiles sector

We expect the auto sector to continue witness robust growth in the
near-to-medium term led by a healthy volume growth due to new
product launches, improved consumer sentiments, and significant
planned investments in the sector. However, with the recovery in the
commodity prices, we expect margins to come under pressure in the
near term.
Improved consumer sentiments to boost sales: The auto
industry witnessed a double digit yoy volume growth in December
2009 preceded by robust growth in November 2009. While car sales
went up by 50.5% in November, the two-wheeler and three-wheeler
segments grew by 38.4% and 36.8%, respectively. The strength in
sales was primarily driven by an improving consumer sentiment on
the back of soft interest rates and an increased liquidity in the hands
of public sector employees. For the Commercial Vehicle, the growth
was further aided by an improvement in manufacturing and mining
activities. Although we expect the volume growth to remain strong in
the coming quarters, we believe the growth in H2’10 will be lower
than H1’10, especially keeping in mind the end of the festive
season, a possible increase in interest rates, and that consumers
may delay purchases in anticipation of the excise cuts to be
announced in February 2010.
New launches to aid volume growth: The deliveries of Nano and
the new launches of i20, A-star, Ritz and Estillo aided the compact
car segment sales. The segment grew by 49.8% yoy in November
2009. In addition, the mid-sized car sales grew by a robust 24.9%
yoy in November 2009 as the market gave a thumbs-up to the
launches of the new SX4 and Indigo Manza. The MUV segment
grew by 85.3% in November 2009 on account of the new launches
and strong consumer sentiments.
Exports volume under pressure: Exports in the month of
November 2009 grew by 25.1% yoy. This seems to be a significant
increase as last year’s number was really low. In the coming
quarters, exports are expected to stay under pressure due to the
withdrawal of EU nations from the scrappage scheme.

Maruti Suzuki India Limited

Maruti Suzuki India Limited (MSIL) is expected to ride well on the
growth wave in the automobile sector in the coming quarters, given
the new launches and upcoming increase in its capacity from
800,000/ year to one million/year by the end of FY10. However, in the
near term, we expect MSIL’s volume to grow at a slower pace than
the industry due to stiff competition in the A2 segment which is also
expected to put the margins under pressure.
Competition subduing the growth impetus: We expect the
Company’s growth pace to be slower than that of the market due to
the competitive pressures faced by the A2 segment (which
contributes ~70% of the total volume) as a result of the launch of
small cars by foreign players (especially Hyundai) and the delivery of
Tata’s Nano.
Export to grow at a slower pace: In December 2009, MSIL exports
increased 223.7% yoy primarily due to the boost from the
“scrappage" incentive scheme of Europe. In the coming quarters, we
expect the Company’s export’s growth rate to mellow down as 11
European countries, except the UK, have recently removed their
“scrappage" incentive scheme.
Pressure on margins: The Company should face pressure on its
margins with the recovery in the commodity prices and stiff
competition in the A2 segment. Thus, we expect the EBITDA margins
for Q3’10 to be 11.6%, as against 13% in Q2’10.


Mahindra & Mahindra

In the coming quarters, we expect Mahindra & Mahindra Ltd. (M&M) to
witness growth on the back of the continuing good show of the
domestic UVs and the tractor segments. The Company sold 22,587
vehicles in November 2009, an increase of 96.2% yoy.
Growth in domestic utility vehicle to continue: In December 2009,
total UV sales increased 120% yoy to 16,999 units on account of the
success of its newly launched UV Xylo and the new versions of the
Scorpio and Bolero. Consequently, the Company maintained its market
leadership with a market share of 64.9% in Q2’10 (vs. 54.8% in Q2’09).
In the coming quarters, we expect the Company to continue witnessing
strong growth due to the upsurge in the demand for UVs, market
positioning, and positive response to its new launches. In addition, we
expect the Company to get a boost from the launch of its mini-truck
Gio, which comes with better fuel efficiency and a lower price tag than
the Tata Ace.
Tractor segment to grow in sync with the sector: Although the bad
monsoon season has impacted the volume growth in the agri-sector in
the third quarter, the demand from the non-agri infrastructure
development projects is likely to offset this softening in demand.
However, rural demand is also expected to pick up from the next Rabi
season, particularly keeping in view the Government’s incentives for
rural development.
Pressure on margins: Going forward, we expect the Company’s
EBITDA margins to decline to 15.2% in Q3’10, as against 18.6% in
Q2’10, on account of the pressure on its margins due to the recovery in
commodity prices and stiff competition in the UV segment.

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