Fortune Equity Brokers expects cars and commercial vehicles (CVs) to post better growth numbers in FY14. Mahantesh Sabarad of Fortune Equity sees passenger vehicles segment registering 11 percent growth and commercial vehicles around 13 percent in FY14.
"Unlike what Society of Indian Automobile Manufacturers (SIAM) is leading us to believe, the growth can be quite faster in FY14," he said in an interview to CNBC-TV18.
According to SIAM, total passenger car sales in India dipped by 7 percent in FY13, first decline in annual car sales over a decade. However, the industry body is hopeful of a pickup in FY14 and sees domestic car sales growing by 3-5 percent and CVs by 7-9 percent.
Below is the verbatim transcript of Mahantesh Sabarad’s interview on CNBC-TV18
Q: SIAM believes that there could be a growth of about 3-4 percent in domestic car sales and CVs might grow by 7-9 percent. What are your estimates? Do you think this kind of growth may come through?
A: We are looking at a much better growth when it comes to cars and the passenger vehicles as a whole. We are looking at a number closer to 11 percent in terms of growth for passenger vehicles. As far as commercial vehicle is concerned, we are looking at a slightly better number than 11 percent, maybe around 13 odd percent. So unlike what SIAM is leading us to believe, the growth can be quite faster in FY14.
Q: I was more intrigued by the CV sale numbers, the medium and heavy commercial vehicle sales were down 23 percent and that was the weakest link. What have you made of their forecast that it would be up 1-3 percent in the current year?
A: We are looking at a much stronger growth in the year ahead.
Q: Are you looking for a better growth in medium & heavy commercial vehicles (M&HCVs) segment as well?
A: Yes, even M&HCVs. They are prone to cyclical behaviour. There is a large amount of postponement of purchases that has happened in case of M&HCVs. Those postponed purchases, somewhere get timed in terms of actual sales in the following year and that’s why we are going to look at a much faster growth in the year ahead. Economy is going to grow much faster than the year gone by and we will have greater freight movement, better freight rates availability and there is a chance of interest rate going down.
All these factors favour relatively faster sale transactions in the coming year, so a faster sales growth.
Q: There is nothing on the ground that suggests an improvement in sales. Management believes that another 2-3 months of pain is perhaps what this industry might see. When will we see the bottom in terms of the auto sales and how would you approach some of these stocks now, any buying opportunities?
A: If you look at freight rates in the trucking freight industry, they have not fallen as sharply as the sales seem to suggest but have fallen quite slowly. In fact, the benchmark rates are very often provided by railways and it has been raising freight rates time and again. Last year, the freight rates were about 23 percent and this year looks like with the freight adjustments on fuel being done, it will be another 11-15 percent increase in rail freight rate.
Road freight will follow those rates in tandem, but with a lag, that is one signal we are looking at.
Secondly, we are looking at all CV manufacturers sitting on light on inventories, both at their end as well as dealers end. That means they can fill up the pipeline inventory if the situation is good enough. This will happen when interest rates or lending rates start falling. We know policy rates have been adjusted lower, but that has not resulted in lending rates actually going down.
Once we see lending rates going down, we will see that spurt in activity in terms of pipeline inventory being also filled in and are signals that we have been watching.
Finally, when you look at credit growth for commercial truck operators, some data released with a lag by Reserve Bank of India (RBI) seems to suggest that the credit growth there is faster than the overall industry credit growth.
Q: Which stocks are you buying? Is there any stock in the four-wheelers space?
A: We have virtually no sell call right now on the automobile stocks that we cover. We have a mixture of hold and buy calls. Some of the best picks would be Hero Motocorp. We are also looking at substantial upside in Mahindra and Mahindra (M&M), a four wheeler stock. We recently upgraded Maruti from a sell to hold. We have been maintaining a sell call on Maruti for over a year now and so there has been an upgrade from our side, but it is still not a buy. Other stocks that are largely hold are Bajaj Auto and Ashok Leyland.
Q: What did you make of TVS after their deal with BMW?
A: I don’t cover TVS. So, I don’t want to venture out giving a stock recommendation here, but then the deal is good for the company. However, the market is trying to discount it too early. The actual first vehicle or motorcycle to be produced is going to in 2015, so it is too early to comment on that.