Interest rate peaking next trigger for auto sector: Expert

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Interest rate peaking next trigger for auto sector: Expert

Auto companies have started releasing their November sales figures. Mahantesh Sabarad, Senior vice president-institutional equity research, Fortune Equity Brokers spoke to CNBC-TV18 about his outlook for the sector now.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about Maruti Suzuki See previous management interviews See what other Experts & Brokerages are saying about Maruti Suzuki Maruti Suzuki BSE | NSE 28/05/12 Are Mutual Funds betting on Maruti Suzuki? Other Stocks in this news Mahindra and Mahindra | Tata Motors | Ashok Leyland | Hero Motocorp |

Auto companies have started releasing their November sales figures. Mahantesh Sabarad, senior vice president-institutional equity research, Fortune Equity Brokers spoke to CNBC-TV18 about his outlook for the sector now.

He says that he expected better from Maruti, but M&M's sales figures give a huge boost to confidence in the company. Sabarad expects Tata Motor's new micro-trucks, Ace Zip and Magic IRIS, to push up yearly sales for the company apart from the Nano working its magic.

He says that the two-wheelers could see some pressure on profitability as growth moderation sets in and that could lead to the stocks being underperformers in the sector.

"Interest rate peaking out is the next trigger to watch out for the sector," Sabarad says.

Below is the edited transcript of the interview. Also watch the accompanying video

Q: What have you made of the Maruti numbers, gives you some reason to smile?

A: I am actually contrarian here. I didn't like the numbers that have come in. My expectations were higher; I would have expected them to do 8,000-10,000 units better than what they have reported. I think this stock is not reacting so buoyantly as the rest of the market, so there you have it.

Q: Last month, we saw M&M come out with a great set of monthly sales numbers. This time around where do you expect the maximum growth?

A: Mahindra will continue to do well. Yes, among the automobile companies, they will possibly report the highest growth in year-on-year numbers; we are looking at them going somewhere at around 35-38% growth year-on-year. So they had been doing that kind of pace now for the last three-four months already, so no problems as far as sales growth for Mahindra is concerned.

Q: What about Tata Motors ? What is the expectation? That was where perhaps the slowdown was showing up very significantly?

A: Yes, you are right. Last month they did about 68,000 units. This time around also we are expecting that they will do 68,000, but while the month-on-month number will appear flat, on a year-on-year, that would be almost 25% growth if I recall correctly. So that number will be quite a sound one.

What is really happening for them is the LCV space is growing quite well, and they have launched new products in what they call as micro-trucks- Ace Zip and Magic IRIS. Those will bring in helpful volumes and hopefully, Nano will do a better numbers than what they have done previously. Nano clocked 3,800 unit sales last month.

Q: There is a top brokerage which has come out with a note where they have cut the MHCV sales growth in FY13 to zero versus a 10%. That would perhaps impact something like an Ashok Leyland . Where would you stand on that?

A: I am not looking at a zero percent growth rate in commercial vehicles. Actually cyclically if you see, the better measure would be a 12-month moving average sales of MHCVs. Then you will see that they are actually at around 10.5% odd on a moving average basis, and cyclically, it seems to be bottoming out.

The next trigger for growth will depend on interest rates peaking out. If interest rates do peak out by December with the RBI signalling a halt in rising interest rates, then we might see the semi-cycle turning positive somewhere around June, July or possibly August. So I am not too negative on commercial vehicles, and definitely not putting out a number which is zero percent growth for FY13 over FY12.

Q: What is your take on two wheelers and the three key stocks that represent the sector?

A: There will be moderation of growth there. Last month, we have seen that on a year-on-year basis, the entire industry grew at just about a 1% rate. This time, the number would be slightly better, but then the moderation is setting in for the industry players. Secondly, the outlook is not too great for some of the players like Hero Motocorp in terms of their profitability because pressure is coming in; operating leverage will now be down. So as far as the stocks go, they are going to have a bout of underperformance in the year ahead.

Q: Could you tell us your top picks in the auto space then with the target price?

A: There is first Tata Motors to begin with, that's got a target price of Rs 230 right now and is a buy for us. Ashok Leyland too is a buy for us. These are the two stocks that we would pick on a one-year forward basis and one-year down the line, we expect them to do better.