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May 04, 2012, 01.39 PM IST
Ajay Sethia, research analyst at Centrum remains cautious on the commercial vehicle sector after most of the auto majors posted mixed April sales numbers.
Autos have been among the leading gainers in April, with the BSE sub-index up 5.04% in April on hopes that sales will improve after an interest rate cut was seen bringing down the cost of vehicle financing loans.
However, disappointment over April sales out over the past two days have led some investors to pare their bullish bets, while recent talk of a hike in fuel prices are also sparking worries about sales of petrol vehicles.
Meanwhile, TVS Motor recorded a jump in sales by 4% (YoY), but its monthly sales dropped by 4%. The two-wheeler company's yearly exports dropped by 12% with just 22,200 odd units being exported.
On the other hand, Hero Motocorp's April sales stood at 551,557 units versus estimated 517,099 units (YoY), which Sethia says, was better than industry. However, he foresees further pressure on EBITDA margin going forward.
Bajaj Auto said during April 2012, it sold 3,42,324 two-wheelers, representing a 6% growth over the April 2011 sales of 3,22,235 motor cycles. However, the sale of commercial vehicles took a hit in April this year, falling by 13% to 39,266 units compared to 45,074 units in April 2011.
Sethia expects Bajaj sales to pick up post new launches, which include the much-awaited new 125cc motorcycle.
Below is an edited transcript of Sethia's interview on CNBC-TV18. Also watch the attached video.
Q: Let's start off with the one, which is been the star for the auto space so far, Tata Motors. What did you make of those numbers?
A: Clearly, Tata Motors saw some pressure in the commercial vehicle (CV) space. We continue to remain cautious on the entire CV space. There is a lot of pressure on ground. After our interaction with the fleet operators, we understand that the freight rates are not moving up inline with the cost increases. So definitely there is a pressure on the commercial vehicle side.
Q: How much would you expect the tick to go down to for Tata Motors in specific, especially on the CV side?
A: If you see for FY12 the overall industry had seen a growth of nine-10%. During FY12 Tata Motors had bucked the industry trend by registering better growth rate as compared to its peers. Going forward, we believe that the commercial vehicle space would continue to grow at 8-9%, largely the MUV and SUV space.
We continue to see a strong traction in the light commercial vehicle (LCV) space. So net-net, we definitely believe that the growth rate in MUV and SUV would be lower as compared to FY12 and the momentum in LCV should continue.
Q: From the two-wheelers, which set of numbers did you like the best because Bajaj Auto looks strong but then there was quite a bit of exports thrown in there?
A: Within the two wheelers space, Hero MotoCorp has bucked the industry trend by registering better numbers. Traditionally, April and May is one of the strongest months for Hero MotoCorp. The numbers were more or less inline with what we had expected.
On the other side, Bajaj Auto the growth rate would be driven by the new product launches going forward. They are planning to launch bike in 125cc segment and you would see upgrade of Pulsars coming in.
My sense is that Bajaj over a period of time should start registering better volume numbers as compared to what you have seen right now.
Q: What did you make of the Hero Moto numbers and the way the market chose to react to it? Was it just because of that dividend issue or do you think the market is sensing some slippage coming from Hero?
A: There are two or three things. Definitely at the operating level, the performance was slightly disappointing as compared to what the street was estimating. The EBITA margins came at 15.3% compared to street estimate of 15.6%.
Going forward, we foresee pressure in terms of EBITDA margins, which would be largely on account of two or three things. They are getting into export market, so my sense is that the initial profits would be taken away in terms of building the export franchise in a way of brand building, advertising and promotion. So, over the next three to four quarters the export would not be a profitable volume growth story but probably post that it could stabilise.
Also, they would have to incur on the research and development (R&D) spend, which currently is not even 0.2% of their overall sales. So, there would be 0.3-0.4% (cost increase) to sales as the R&D expense that would further put pressure on the profitability. So net-net there would be pressure on the EBITDA margins as compared to what you have seen right now.
In terms of valuations, it is currently trading at 16 times FY13 and closer to 14 times FY14, which leaves limited upside from the current levels. We continue to maintain hold on Hero MotoCorp.
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