Motilal Oswal Travelog: Analyst's Diary for Auto 2012

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Motilal Oswal has come out with its report on various auto stocks.

Eicher Motors :

• Short-term growth would be driven by ramp-up of nascent operations in heavy-duty CVs and de-bottlenecking in 2Ws
• CY13 would be the inflection point, with doubling of capacities (CVs and two-wheelers) and commissioning of the engine project. Flawless execution would be the key catalyst for the stock.

Valuation and view: Short-term growth would be driven by ramp-up of nascent operations in heavy duty CVs. CY13 would be the inflection point, with doubling of capacities (CVs and two-wheelers) and commissioning of the engine project. Flawless execution would be the key catalyst for the stock. The stock trades at 12.1x CY12E consensus EPS of INR123.3 and 9.8x CY13E consensus EPS of INR152.8.

Hero MotoCorp :

• While the festive season has been good, retail sales in November-December exhibit signs of demand slowing down.
• Benefit of weak commodity prices (especially rubber) would reflect by 4QFY12.
• Export ramp-up would be gradual, starting from 4QFY12, with initial exports to Africa and later on to markets like Egypt, Iran etc.

Valuation and view: Launches in new segment (Impulse and Maestro), addition of 500 dealerships to dilute any short-term slowdown in volumes. Exports also offer significant opportunity, though ramp-up would be gradual. We factor in volume growth of 16% in FY12 and 12% in FY13. EBITDA margin could revert to the mean of ~15% over the next three years. We estimate EBITDA margin (adjusted for royalty) at 11.4% in FY12, followed by 80bp expansion to 12% in FY13. The stock trades at 14.2x FY12E EPS of INR121.5 and 12.1x FY13E EPS of INR142.3. Maintain Buy with a target price of INR2,277 (~16x FY13E EPS).

Maruti Suzuki :

• The company expects margins to come under further pressure in 3QFY12, as the full impact of weak INR and QoQ drop in volumes (due to strike in October 2011 and maintenance in December 2011) gets reflected.
• The management indicated that while visibility on FY13 remains low, consumer sentiment is not improving and the company may not see any growth in FY13.
• It is focused on developing amicable relations with its Manesar workers. Unlike the past, it is communicating much more and is trying to solve any problems at the initial stage itself.

Valuation and view: We model 15% de-growth in FY12 volumes, followed by 16% growth in FY13. We estimate EBITDA margin at 6.8% for FY12, improving to 8.4% in FY13. Maruti Suzuki has underperformed the Sensex by 7% over the last 12 months, as it has been losing market share and margins have been under pressure on account of labor issues, RM cost push and adverse forex movement. With easing of supply and capacity constraints, we expect Maruti to recover and defend its market share, despite competitive pressure. Valuations are below average on trough earnings and are close to previous downcycle P/B multiple. The stock trades at 14x FY13E  consolidated EPS and 8.9x FY13E cash EPS. Maintain Buy with a target price of INR1,202 (~11x FY13E cash EPS).

Ashok Leyland - Pantnagar plant:

• Ashok Leyland's Pantnagar plant is operating at ~3,000 units/month, which would be ramped-up to ~4,000 units/ month by March 2012.
• It has ~70 vendors in and around Uttarakhand, and it is currently sourcing ~60% of components (in value terms) from Uttarakhand and Himachal Pradesh. This could further increase to 70-75% over the next 12 months.

Valuation and view: We expect CV demand to slow down, impacted by higher interest rates. However, Ashok Leyland would be able to offset the impact of any slowdown in CV volumes and grow earnings driven by higher contribution from Pantnagar. The stock trades at 11.3x FY12E EPS of INR2.1 and 9.1x FY13E consensus EPS of INR2.6, and currently offers a dividend yield of 4.3%. Not Rated.

Bajaj Auto :

• The management expects 2HFY12 margins to be boosted by a weak INR and declining commodity prices.
• Domestic industry volume growth in FY13 would be 12- 13%. Bajaj Auto would outperform, driven by new launches including Pulsar and Discover. (both new platform).
• Exports would grow at ~20% CAGR, with the contribution of exports increasing to over 50% by FY16.

Valuation and view: We factor in volume growth of 18.6% in FY12 and 13.6% in FY13, driven by the launch of new Pulsar and Discover in 1HCY12 along with 3-4 new launches/ refreshes in FY13. EBITDA margin is likely to stay at 20.3% in both FY12 and FY13, led by better product mix, higher contribution from Pantnagar plant and higher operating leverage. Continuance of strong volume momentum in domestic market and further in-roads in exports to be key drivers for the stock. The stock trades at 12.9x FY12E and 11.4x FY13E EPS. Maintain Buy, with a target price of INR1,877 (15x FY13E EPS).

Tata Motors - Pune plant:

• Tata Motors' Pune plant has a capacity of ~1,500 units/day, with ~850 units/day for CVs and ~650 units/ day for PVs (on two-shift basis). Activity levels at the plant reflect muted demand for PVs and CVs. Lines for Xenon and Aria are operating on single shifts.

Valuation and view: The stock has corrected 16% over the last twelve months. Valuations are at 11.5x FY12E and 9.4x FY13E normalized EPS for ordinary shares. Buy with an SOTPbased target price of INR237 for ordinary shares.

Bharat Forge :

• Based OEMs production plans, Domestic M&HCV volume guidance resilient with ~8-9% growth in 2HFY12 v/s 9% in 1HFY12, and ~10% for FY13.
• The management is targeting 15-20% revenue growth and ~20% EBITDA margin in FY13. Current capacity (standalone) can drive 40% volume growth.
• The company has reduced breakeven volumes by reducing staff and fixed cost. Its breakeven utilization levels are: (a) domestic - 20%, (b) Baramati (non-auto) - 35-40%, and (c) Overseas - 45% (65% earlier).
• Non-auto business would contribute ~60% of revenue and is likely to grow at 15-20% CAGR. JV with Alstom should be operational in CY13 and is likely to attain 80% utilization by CY16.

Valuation and view: While growth over next two years would be driven by continued recovery in the auto segment and ramp-up of existing non-auto business, commencement of Alstom JV in FY14 would be key driver for long-term growth. The stock trades at 14.4x FY12E cons. EPS of INR17.4 and 11.6x FY13E cons. EPS of INR21.6. Not Rated.

Valuation and view on auto space:

• Two-wheelers and M&M have outperformed in the last six months. Tata Motors and Maruti Suzuki have underperformed.
• With interest rates likely to decline and stable commodity prices, we believe there would be a revival in the performance of four-wheelers. We prefer Tata Motors and Maruti Suzuki. In two-wheelers, we like Hero MotoCorp, as its margins are set to improve, driving EPS growth of 17% in FY13.

Public holding more than 90% in Indian cos

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