India autos stuck in first gear: AnandRathi
According to AnandRathi, auto sector revenues are expected to grow just 3.2 percent, led by higher realizations, while auto volumes declined in most segments. Two-wheeler volumes and M&H CVs were particularly under pressure. Tata Motors and Motherson Sumi Systems are the top picks in the sector.
India autos review by AnandRathi
Auto companies are expected to report subdued 3.2 percent revenue growth, as volumes were lower in most segments. We expect a 10bps yoy reduction in EBITDA margins. On lower profitability at two-wheeler and CV companies, we expect net profit to be lower 3 percent yoy. We are underweight on the sector as we expect valuations to correct in the near term.
Revenue growth subdued: We expect sector revenues to grow just 3.2 percent, led by higher realizations, while auto volumes declined in most segments. Two-wheeler volumes and M&H CVs were particularly under pressure. Passenger vehicle growth was also subdued, but tractor sales surprised positively. Three-wheelers were decent, while LCVs which performed well in FY13, also witnessed lower demand.
Stagnant EBITDA margins: An increase in operating costs, lower operating leverage and continued competition are key challenges for the sector, though we could see tailwinds on this front. We expect 12.9 percent EBITDA margin for the sector (lower just 6bps yoy).
Net profit likely to decline. In 1QFY14, we expect profit to be lower just 3 percent yoy, driven mainly by Tata Motors, Maruti Suzuki and M&M. Among auto component companies, Motherson Sumi and Swaraj Engines could be the standout performers.
Our take: We are underweight on the sector as we expect valuations to correct in the near term.
"Among the smaller companies, we prefer VST Tillers and Suprajit Engineering. We have a Sell on Maruti Suzuki and Bajaj Auto on fair valuations. We are negative on Ashok Leyland due to the CV cycle, and on Hero MotoCorp on weak two-wheeler demand," says AnandRathi research report.
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