Ajay Shethiya of Centrum Capital, in an interview to CNBC-TV18 shared his outlook on auto stocks. He said, Bajaj Auto results were in line with their expectations. However, there is limited upside for Bajaj Auto and have downgrade Bajaj Auto from buy to neutral, he asserted.
He further added, “We continue to remain neutral on the overall two wheeler space”. At the moment Bajaj Auto is priced to perfection and the target price is closer to Rs 2200, he added.
Hero Motocorp margins to expand on a sequential basis largely driven by better volume growth, he said.
Below is the edited transcript of his interview on CNBC-TV18
Q: What is your expectation on Hero MotoCorp and what you are expecting in the two-wheeler sector after seeing Bajaj Auto’s performance?
A: For Hero MotoCorp, we are expecting profit after tax (PAT) close to Rs 593 crore and on EBITDA margin front, we expect the margins to expand on a sequential basis largely driven by better volume growth.
As far as Bajaj Auto is concerned, the overall operating results were inline with our expectations. We were expecting around 20 percent in terms of EBITDA margins and they have delivered around 20 percent. In terms of PAT, our expectation was around Rs 818 crore and they delivered around Rs 820 crore.
Q: What is your sense about relative performance of Bajaj Auto and Hero MotoCorp? There is news or buzz that Hero is saddled with higher inventories – between the two what is your stock preference?
A: We continue to remain neutral on the overall two wheeler space. We used to prefer Bajaj Auto over Hero MotorCorp but looking at the valuations, we have downgraded the stock from buy to neutral and continue to maintain our stance post their results as well.
Honda right now has current capacity of 2.8 million units and which is likely to move to around 4 million units by next financial year. That would additionally put pressure on Hero MotoCorp in terms of the overall market share. However, the long-term growth for two wheelers has been in the range of 10-12 percent over the last 15 to 16 years and we expect the growth rate to again be 10-12 percent in FY14.
Q: What would be the call on Bajaj Auto; is it priced to perfection for FY14 growth or is there headroom?
A: Yesterday, Rajiv Bajaj mentioned in his interview about volume guidance of closer to 5 million units as compared to 4.3 million units, which they would be doing right now. Even taking the favourable currency which would be at Rs 54 to dollar compared to Rs 49, which they are currently realising, you would end up at earnings per share (EPS) closer to Rs 136-137 and that would mean that the stock is trading at 59.5 times. So, it is largely price to perfection and currently we have got a target price closer to Rs 2,200.
However, there seems to be limited upside from the current levels, so largely we would maintain our neutral call on the stock.
Q: Tata Motors is up 3 percent today. Yesterday’s numbers did not seem to go down well with a few on the street. What was your expectation and what is your call on Tata Motors?
A: Post the November numbers; we did have discussions with the management. Management had clearly indicated the wholesale sales for the month of December would be lower by 2000 to 2500 units. This is largely to do with the production cut, largely on account of the festive season. So the results were in line with expectations. We were looking at a marginal drop on a month on month basis and that has come through.
Q: I guess Mahindra and Mahindra and Maruti Suzuki are not exactly comparables considering their product profiles. But nevertheless, just taking one theme in terms of the diesel price, Mahindra stock has been the beneficiary of the government mispricing diesel and Maruti stock did not take advantage of it because they do not have such a big diesel production unit at all. In 2013, do you think this role will reverse as diesel gets more and more correctly priced. Do you think Mahindra will loose the lure it had in 2012?
A: Historically, the utility vehicle segment is largely where more than 99 percent of vehicles are on diesel. So even if there is increase in diesel prices, it would not lead to a significant drop in the sales for utility vehicles.
The competition is getting intensified for example Mahindra & Mahindra’s flagship models- Scorpio is facing pressure. Our interaction with dealers indicates that there is no waiting period on XUV. On the other hand, Duster is doing extremely well, which is to an extent eating away the market share. Everybody is excited about Ford’s EcoSport and that is something which would intensify the competition going forward. There are lot of launches which are expected in the UV space.
While the growth would continue, the existing players would have a challenging time given the competition coming through from the other players.
As far as Maruti is concerned, we had interaction with dealers yesterday and we understood that over the last one month there has been an increase in enquiry about the petrol vehicles. So there is no waiting period on the diesel variants but the demand for petrol vehicles has gone up.