Dec 03, 2016 10:20 AM IST IST | Source: Moneycontrol.com

Dec auto sales key post demonetisation, experts pick best stocks

With maintaining Maruti Suzuki, Eicher Motors and Tata Motors as preferred picks in auto sector, Nomura said for Tata Motors, China luxury tax impact on EBITDA is likely to be less than 1 percent even if around 20 percent of buyers switch from Range Rover to Range Rover Sport.

Moneycontrol Bureau

As overall auto sales data for the month of November was mixed analysts say December month will be important for auto sales data because demonetisation impact is likely to ease while for commercial vehicle business, next three-four months will be key, especially ahead of change in emission norms as after that vehicle prices will increase.

"We expect the next 3-4 months to be extremely volatile for commercial vehicle industry as the negative effects of demonetisation could be partially offset by a pre-buy ahead of the introduction of higher emission norms from April-2017," Deutsche Bank said.

Deutsche has hold rating on Tata Motors with a target price of Rs 500 and Eicher Motors with a target of Rs 20,000 while it has buy rating on M&M with a target of Rs 1,400.

Nomura said another concern is that, as per current notification by government, BSIII trucks cannot be 'registered" after April 1, 2017. Manufacturers want this to be "production" deadline as has been the case in the past. Otherwise, there will not be enough time to pre-buy and production switch over will be required by January-February 2017.

With maintaining Maruti Suzuki, Eicher Motors and Tata Motors as preferred picks in auto sector, Nomura said for Tata Motors, China luxury tax impact on EBITDA is likely to be less than 1 percent even if around 20 percent of buyers switch from Range Rover to Range Rover Sport.

China has imposed a 10 percent luxury tax on vehicles priced above CNY 1.3 million. In the case of JLR, only Range Rover retails at a price of more than CNY 1.58 million and is likely to be impacted. However, the impact is likely to be minimal given that it contributes around 2.4 percent of UK production, the brokerage house said.

Goldman Sachs said wholesale dispatches in categories such as commercial vehicles, cars and two-wheelers have surprised with only a limited drop, given the sharp fall in demand post demonetisation.

This it believes is driven by restoration of channel inventory post robust festive sales in October 2016 and original equipment manufacturers passing on the inventory pain to dealers. It expects a marked correction in December 2016.

Goldman has retained buy rating on Eicher Motors, Maruti Suzuki, TVS Motor and Ashok Leyland while Bajaj Auto and Hero Motocorp are on its sell list. Its rating on Tata Motors and M&M remained neutral.

Meanwhile, Maruti Suzuki, Eicher Motors and to some extent Ashok Leyland showed good performance but impact of currency demonetisation was largely seen in Bajaj Auto, Hero Motocorp, TVS Motor, Tata Motors and M&M.

Channel re-stocking after festive season and continued waiting period for Baleno & Vitara Brezza helped Maruti to outperform in November, showing 12.2 percent sales growth YoY. Eicher Motors maintained its lead in 2-wheeler space, registering a 41 percent growth despite 8 percent decline in bookings compared with September-October average.

In a conference call, Eicher said it has not seen any material cancellation or postponement of demand and has also not participated in any discounts etc to boost demand. However, financing share has gone up from 35-40 percent earlier to 43 percent, share of banking channel used (cheques etc) has increased from less than 25 percent earlier to 50 percent now, while cash purchases have declined from around 40 percent to 10 percent.

However, medium & heavy commercial vehicles industry disappointed in the month gone by, with volumes down 12 percent. After 17 percent growth in October, Ashok Leyland's growth slowed down to 10 percent while Tata Motors reported a steep 23 percent decline (though Tiago lifted passenger vehicle sales 22 percent), and VECV showed 13 percent drop in overall CV volumes.

Commercial vehicle companies' commentary indicated that fleet owners have deferred purchases due to a cash crunch and this can keep near-term demand muted.

Mahindra & Mahindra hit the hardest not only on auto front but also in tractor business, down 21-22 percent due to severe cash crunch in rural parts of the country, which contributed the most to its overall business. In two-wheeler space, Hero Motocorp's sales declined 12.9 percent, TVS Motors down 0.5 percent and Bajaj Auto slipped 13 percent.

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