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In an interview to CNBC-TV18, Hitesh Goel of Kotak Institutional Equities analyses auto stock names like Tata Motors and M&M.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: What kind of numbers are you expecting from JLR China? Are the market fears warranted?
A: We are looking at an overall growth of 20% for JLR in FY13. This year they will do close to 308,000 to 310,000 numbers and in China we are looking at 20% to 25% growth next year. I believe in China there are some signs of a slowdown in the luxury car market in the sense that Audi, BMW and Daimler, the high end models are giving some discounts which is also a case where the property market is slowing down there because of which a higher amount of vehicles that go to the government especially in Audiís context because of which the segment is slowing so they are basically focusing more on the consumer segment.
But if you look at it from a JLR angle they have shortage of capacity right now. Evoque is doing well, they have waiting periods across markets. So until August of this year you will see strong growth in JLR happening because the base effect is very low. The full year impact of Evoque will come through in FY13. Until there is a significant slowdown in the Chinese market, I donít see major impact on volumes for JLR but yes we do our penciling in 100-50 basis points reduction in margins overall of JLR because we think these margins may not be sustainable as Audi, BMW and Daimler focus more on the Chinese market where the possibility is very high currently.
Q: Do you think JLR in China would have to resort to significant discounting which is what you are building in the pricing model now?
A: Not significant discounting but there are two things happening. If you look at the third quarter results, the margins were very robust because of the currency benefit that they got. Secondly, they sold more of higher-end Evoque models in China and other markets because of the capacity constraints.
Going forward, as volumes increase for Evoque you will start seeing lower-end models increasing in a mix because of which your margins could trend down. Audi is also focusing more on this lower-end SUV segment because that is a segment that is growing at a robust pace. So in that incremental competition there is increase in that space.
Q: Do you still have a reduce rating on the stock? If yes, is it on concerns of valuation after the recent rally or are those concerns fundamental?
A: Yes. Basically we have a reduced rating. We are not overly bearish on the stock right now. Our target price is Rs 285 where the current stock price is. It is more or less trading at a fair value. The stock is already factoring in a very strong growth for next year and the only thing that can take the stock higher from here is if there is further margin expansion in JLR.
To give you a sense, BMW and Audiís EBIT margins used to be 7-8% historically three-four years back but for the last one-two years, their margins have moved to 11-12%. All of them are trading at very high margins because of very strong growth in China which could correct in the medium term and the margins could trend down lower in our view so that is what we are factoring in. If there is a margin expansion in JLR the stock could go up 10-15% from here.
Q: What is your current rating on M&M which has seen quite a bit of correction pre-Budget, on the weak tractor numbers and also on fears of the diesel tax hike which never came?
A: M&M is a top pick in this space. We have a sell rating and a reduce rating on all the stocks except for M&M and Ashok Leyland. On M&M we are positive more on the valuation front. We believe that utility vehicle space will continue to grow at a strong pace because of the XUV 500 which has garnered a very strong response. With no diesel tax coming through M&M is likely to benefit because there is not much competition in that space for M&M.
On the tractor front yes, the slowdown is there. For some months you will see the slowdown because the crop prices have come down. In that sense, customer sentiment has been impacted but if there is a good monsoon it still see their collection on the financing side getting pretty robust.
So if there is a good monsoon you could see tractor growth coming back. We are only penciling in a 7% growth for tractors but the current stock price in my view is factoring in 10% de-growth for tractors for next year which I donít think so will come through. I still believe there could be growth in tractors although at a slower rate for FY13.
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