Bajaj Auto, Tata Motors top picks in auto space: FinQuest

FinQuest Securities has come out with its report on auto sector. The research firm believes the cars with diesel engines would continue to drive the sales while MPVs and mini/fullblown SUVs would continue to gain at the expense of passenger cars. 

• Passenger Vehicles: The sluggishness in the passenger car market continues while UVs outshine- Maruti Suzuki's (MSIL) has been consistently doing well over the past few months on the back of production stabilization and the continued demand of its Swift hatchback and notchbacks. The Ertiga MPV has also consistently performed with a monthly volume of 7-8k. Even though the new Alto 800 received a very good response clocking more than 50,000 bookings we believe that it has cannibalized the other variants of Alto, thus resulting in the overall decline in the volumes for that segment in Nov. ‘12. M&M has continued its stellar run as it posted a robust 38% Y-o-Y growth in passenger vehicle sales on the back of robust demand for its XUV 5OO, Bolero and incremental volumes from the newly launched Quanto mini SUV. Tata Motors (TML) has been struggling in the passenger car business while the demand for SUVs in the market coupled with its newly launched Safari storme brought in some incremental volumes for TML.
   
  - +Ve for M&M, Maruti, -Ve for TML
   
• Commercial Vehicles: LCVs (mainly Small Commercial Vehicles) post good growth but MHCVs continue to disappoint- Lower cargo offerings, dropping truck rentals, slow down in manufacturing sector has leading to a drop in sale of new trucks. The continuous usage of old trucks in the freight market has resulted in truckers not able to dissolve their existing old fleet. These factors have resulted in the continued slowdown in the MHCV segment. The post Diwali rise in freight rates didn't sustain as truck rentals declined by 5-6%, thus exasperating scenario further for the MHCV market in India. All top players suffered including TML (down 41% Y-o-Y), ALL (down 36% Y-o- Y), Eicher Motors (VECV) (down 2% Y-o-Y) and M&M (down 46% Y-o-Y). On the LCV front, TML did well driven by its SCVs Magic Iris and Ace Zip while other players like M&M, ALL also did well with their Maxximo & Dost range respectively.
   
  -Ve for TML, ALL, M&M , +Ve VECV 
  
• Two-wheelers: Sales start to recover in the festive season but sector still not out of the woods- We believe there is a strong structural shift happening in motorcycles from the 100cc to 125cc category. This shift has had a major impact on Heromoto Corp (HMC) with its sales declining 6% Y-o-Y. The shift of consumers away from the Hero brand to Honda is also a major cause of concern. BAL has performed better in the domestic market with sales up 1% (including 3 wheelers). The structural shift from 100cc bikes is expected to benefit BAL who is the market leader in the 125-250cc market. TVS also performed well posting growth of 5% in motorcycle volumes, with incremental volumes coming in from the newly launched Phoenix 125. Both TVS and BAL performed exceedingly well on the 3W front with volumes going up by 87% and 7% respectively.
   
  - +Ve for BAL, TVS, -Ve Hero Motocorp 
  
• Farm Equipment (FES): Good performance in Nov '12. Delayed rains could result in good Rabi crop, thus aiding in tractor Sales- Labor shortage in rural areas is increasingly pushing the smaller farmers to buy the sub-20 hp tractors, increasingly large farmers are upgrading to 50 hp tractors. Sales in the sub-20 hp tractors grew 148% Y-o-Y in September and the total share of these tractors increased to 3% in overall tractor sales with this segment mainly controlled by M&M (Yuvraj) and VST Tillers. The 21-30 hp segment has seen the biggest decline. However M&M put up a stellar show with domestic volumes growing by a massive 22% Y-o-Y. The Commission for Agricultural Costs and Prices (CACP) has decided to stick to last year's minimum support price (MSP) of wheat at Rs 1,285 per quintal for 2013-14 as well. If wheat, a major rabi crop in north and central India, remains at last year's level, farmers might keep away from purchasing farm equipment. This is because farmers incur much higher costs on various other heads and will be left with much less money to spend for mechanization.
   
  +Ve for M&M 

Outlook: In the passenger car segment, passenger car volumes have been subdued but the craze for UVs continues. M&M has been the main gainer from this spurt with even Maruti also gaining from the success of its Ertiga MPV. We believe the cars with diesel engines would continue to drive the sales while MPVs and mini/fullblown SUVs would continue to gain at the expense of passenger cars.

On the CV front, the lacklusture economic activity, coupled with higher second hand truck inventory in the market have put pressure on the freight rates which have declined by 5-6% post Diwali. Even though LCV market continues to be good, driven by market leader TML (whose Magic Iris and Ace Zip models have been selling well); ALL & M&M also reported good growth from their LCV portfolio driven by their Dost and Maxximo range.

For 2W makers, the performance was mixed with Hero witnessing a sharp decline while BAL and TVS witnessed some recovery in volumes in Nov'12. We believe the decline in volumes for Heromoto is more of a structural issue as there is a shift happening from 100cc to 125cc motorcycles. As more and more people shift to higher capacity bikes BAL will be the major gainer where it is the major player.
 
Our Picks:
Bajaj Auto (BAL)'s volumes have started to recover after a spate of sluggish numbers over the past few months. We continue to be bullish on the stock mainly on account of its superior technology and its new products viz. the executive commuter (Discover 125ST) and premium category (KTM Duke 200 & new Pulsar 200NS) doing well in the market. BAL is also heavily banking on the new 100cc motorcycle which is expected to be the most advanced 100cc motorcycle to be launched in India. We are also very bullish on the new Duke 390(recently showcased in EICMA) and the new bigger Pulsar that is expected to be launched in FY13-14. We reiterate Buy rating on the stock with a target price of Rs 2,276.

Tata Motors (TML)'s domestic performance has not been good off-late mainly due to sluggish CV market while even the passenger car market has done badly. Even though TML has been doing reasonably well in the UV segment volumes are quite low to make any significant impact on the overall performance. However the continued strength in JLR's volumes with many new models being planned like the all-new Range Rover, the AWD Jaguar XJ and XF models are expected to drive volumes going ahead. We reiterate Buy rating on the stock with a target price of Rs 370 by the end of FY14.

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