Amit Kasat, Auto Analyst, Standard Chartered told CNBC-TV18 that now many companies are trying to realign the production with the retail demand in India and the best thing is that companies are not pilled up with inventories. His top picks in the sector are Maruti and Tata motors.
Car sales in India fell for a record eighth month in row in June. Amit Kasat, Auto Analyst, Standard Chartered told CNBC-TV18 that many auto majors are trying to realign the production with the retail demand in India. He says the best thing is that companies are not running high inventories.
Going ahead, he sees FY14 as a very tough quarter for almost all the original equipment manufacturers (OEMs). His estimate is that volumes will not pickup in the second half of the year.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: Let us start with Maruti Suzuki, what have you made of these production shutdowns and what is your call on that stock now?
A: If you just look last three months news flow which is happening on auto OEMs, many companies are trying to realign the production with what the retail demand is there in India. So, one should not look much into it, there is a realignment of the production with the demand which is there in the market.
The best thing within the industry is that the companies are not pilled up with inventories and if that would have been the case then definitely the liquidation of that inventory would have been a big problem. So, slowly and steadily each and every company along with Maruti is trying to realign the production whatever the demand is. I am not worried in terms of the production cuts or the shift which has been stopped, there is nothing much to read into it.
Q: Do you think it will show up only in weak sales numbers or at some point it will start affecting margins as well as price cuts become inevitable?
A: Yes I think FY14 will be a very tough quarter for almost all the OEMs. The matrix which I am following is that the volume definitely is not going to pickup in the second half that is what our estimates are.
So, how the operating cost matrix for each of these companies is going to pan out and management will be able to manage that cost matrix will be a winner in the current scenario. If you also look in the last three months perspective, the retail sales have shown a growth month on month whereas the wholesale dispatches numbers were down.
From that perspective, in FY14 if you really want to look at the auto sector, you have to look that matrix very closely. We still believe that on that matrix Maruti and Tata Motors just because of the JLR can stand out to be a winner.
Q: For most people Mahindra & Mahindra (M&M) was actually an overweight amongst the auto group. What have you made of the recent news flow on that one and can it retain its momentum you think in the months ahead?
A: The positive thing which is happening on M&M today is attractive volume growth which they have shown in Q1. That is close to around 25 percent, which has taken over the decline that happened in the auto sector as well as on the other segments for the company.
However, this company looks from a conglomerate perspective and not only from auto perspective and I think the downside risk on the stock is very minimal. The upside also on the stock is very limited, so it will be range bound anywhere between Rs 900-1000 in the times to come.
Q: What about the two-wheelers, how are you approaching them now?
A: Two-wheeler’s industry have shown almost 10 percent decline in the quarter. Both Hero Motocorp as well as Bajaj Auto has done slightly better in the current quarter as compared to what the last quarter for them was.
However, again there is pain which is there. We hope that in the second half there will be some traction because of the festival season and the two-wheeler demand will come back. I believe that the time has come to re-look at Hero Moto because the Q2, quarterly average volume is much lower where you can see double digit growth happening, if the company continues to deliver 500-1000 units per month.
Q: So at this point what is your top pick from the auto bunch?
A: I still prefer Maruti Suzuki and Tata Motors. Maruti what I am looking is not from a volume growth perspective because the sensitivity with the volume to the earnings is much lower. I am looking at a market share gain for the company, which will be 250-300 bps in the next 12 months perspective.
Tata Motors we have recently upgraded the stock looking at the JLR numbers. People are talking about the margin maintaining at JLR. What we have showcased our report is that the Jaguar business, which never gave a positive EBITDA, definitely this year will be a positive which will cushion the overall EBITDA for the company.
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