Bajaj Auto, Maruti: StanChart's top picks in auto sector

Maruti unrest: State Labour Min suspects external elements

Below is an edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra.

Q: Let’s compare Bajaj and Hero MotoCorp . What have you taken away from the results? The Bajaj management speak was very positive, but it has always traded at lower valuations compared to Hero MotoCorp. How do you see the two stocks moving hereafter?

A: There are a couple of things on Bajaj versus Hero Honda. Definitely, from a business model perspective, Bajaj’s business model is far more superior to Hero Honda. If you just looked from a quarterly perspective, the margin pressure and the realisation pressure for Hero Honda was very muted. This clearly shows that the volume is more on the lower end of each of the segment, which is a volume play with a lesser margin.

If you look from a Bajaj perspective, the cost structure is very, very lean as compared to what Hero Honda has today. So, basically the margin trend going forward, if you just looked from a QoQ perspective, when the volume comes back from the export front for Bajaj, definitely that will keep on outperforming.

On the valuation front, Bajaj is cheaper as compared to Hero Honda. But there are instances in the last five years where you have seen Bajaj trading at a premium or in line with Hero Honda. We believe, in the next three-four quarters, that can happen again.

Q: How exactly are you reading the Manesar situation and any sort of FY13 estimates preliminary that you are working with?

A: It’s an unfortunate event. The company has one of the best product portfolio both on the petrol and diesel. Diesel cars are more manufactured at Manesar plant, Swift and Ertiga will definitely have an impact in terms of the volume, if the issue is not resolved soon, next 10-15 days.

As everybody knows that the total production there is 2,000 units a day. So, basically that will be the impact. That also means that the margins will be under pressure because the diesel portfolio, according to me, has a better margin as compared to the petrol portfolio. So, yes, there will be an impact. It’s too early to estimate what it will be. It depends upon how many days this issue will linger on. But basically 10-15% in terms of the earnings will definitely get impacted, if it doesn’t get resolved sooner.

Q: Do you think there is some permanent damage that might come to Maruti’s valuations? This is becoming a recurring problem and it is a new high in terms of worsening of industrial relations. I can’t remember when we last heard of so many deaths in the course of industrial clashes or in the course of labour unrest and that too localised to one company. Do you think this is now becoming more than just a passing problem and so you will have to visit it on the valuations?

A: I think it is yes. Definitely, on the valuation front, there will be deterioration. I believe that has already happen with the series of strike last year. If you look at Maruti, since it got listed, it use to trade to a premium to the sector and in line with the market. Today, if you look from that perspective, almost 15-20% discount is already there as compared to the market valuation. So, there is a deterioration that has already happened.

With this new event, which has happened, whether it will deteriorate more, that is a call. But from the long only perspective, definitely this is a bigger issue because it is happening regularly now. The company will have to come out with a proper solution to sort out the issues now.