Auto: Volumes to remain under pressure

Slowdown visible across segments except UVs & LCVs: Slowdown earlier visible in passenger cars (2.2% FY12 growth in domestic cars) is now clearly evident in 2W volumes as well, with growth rate moderating to sub 10% since Nov-11. However, UVs and LCVs continue to record strong volume growth. Although volume outlook in the short term is impacted by macro headwinds, we believe long term volume outlook remains positive driven by strong economic growth, softening in interest rates, new product launches and exports potential.

Margins to bottom-out in FY12, with gradual improvement from 1QFY13 onwards: EBITDA margins are estimated to improve in FY13, 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.

Receding macro headwinds augur well for FY13: Lending rates are near peak and are expected to start easing in FY13, auguring well for PV and CV demand. Further, stable fuel price also augurs well for the auto industry, as rising fuel prices was one of the key impediments to growth. Lastly, softening in commodity prices would support profitability. However, weaker INR would impart volatility in operations. Easing of macro headwinds would be a key driver for volume growth and in-turn for re-rating of auto stocks.

Valuation and view: Auto stocks have underperformed in last 3 months, reflecting challenging operating environment. With a positive view on interest rates, stable fuel and commodity prices, we believe that 4-Ws could see revival of performance. We prefer Bajaj Auto and Tata Motors. While we like Maruti Suzuki, on-going lock-out at Manesar plant brings uncertainty and successful resolution would be key for the stock performance.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.