Nov 09, 2012, 02.28 PM IST | Source: Moneycontrol.com

Prefer Tata Motors, Maruti Suzuki, Bajaj Auto:Motilal Oswal

Motilal Oswal has come out with its monthly auto update for November 2012. According to the research firm, worst of competitive pressure is behind for passenger cars, increasing competitive intensity for both 2W, UVs and CVs pose challenge to incumbent OEMs and near term overhang on valuations.

Motilal Oswal has come out with its monthly auto update for November 2012. According to the research firm, worst of competitive pressure is behind for passenger cars, increasing competitive intensity for both 2W, UVs and CVs pose challenge to incumbent OEMs and near term overhang on valuations.

"Retail demand for 2Ws & PVs improved during the festive season with marginal YoY growth supported with recent/new launches (Alto 800, XUV5OO, Quanto). However, pressure continues on the MHCVs segment with weak freight availability and freight rates. Tractor demand though declined on a YoY basis, improved significantly on a sequential basis. Channel inventory across segments is estimated to have reduced compared to last month. Expected softening in interest rates and reform driven improvement in macro environment and consumer sentiment, coupled with long term drivers remaining intact are key drivers for volumes over next few years.

EBITDA margins are estimated to improve in 2HFY13, benefitting from price increases, higher operating leverage and soft commodity prices. However, volatile Fx and increasing competitive intensity in some segments would restrict pricing power. We anticipate price increases coupled with productivity improvement programs and high operating leverage to drive profitability from 2HFY13 onwards.

Lending rates have started coming off from near peak levels, auguring well for PV & CV demand. Further, higher fuel prices have been one of the key impediments to growth. However, softening in commodity prices would support profitability. Easing of macro headwinds would be key driver for volume growth, profitability and inturn for re-rating of auto stocks.

Recent reform initiatives undertaken by the government would help to improve consumer sentiment. This coupled with expected reduction in interest rates, augurs well for pick-up in economic activity and in-turn demand for automobile. Changing competitive landscape in the auto sector would be one of the key determinants of stock performance. While we believe that worst of competitive pressure is behind for passenger cars, increasing competitive intensity for both 2W, UVs and CVs pose challenge to incumbent OEMs and near term overhang on valuations. We prefer Tata Motors, Maruti Suzuki and Bajaj Auto," says Motilal Oswal research eport.

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