IIFL cherry picks best bets in the auto space

IIFL sees Hero’s earnings in the region of 16-18% over the next two years, and also expect margins to improve from current levels, and therefore has a bullish view on the stock. “We are valuing the stock at around 15 times FY14 and we have arrived at a target price of about Rs 2,480, so the earnings estimate for FY14 is around Rs 165,” said Jain.

Also from the two wheeler space, IIFL has a market performer rating on Bajaj Auto . This is mainly due to the pressures the company is facing in international markets and at home. “We also have a market performer rating on Ashok Leyland ,” added Jain.

For Maruti Suzuki , IIFL sees volume traction and growth in margins to continue, and therefore has a buy call on the stock.

Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.

Q: The numbers from Hero Motocorp has drawn a large amount of thumps down. What have you made of Hero Motocorp’s performance?

A: The numbers were not substantially below our expectations. Margins were on 20 basis points lower than what we were expecting, top line was in line with expectations and bottom line also just around Rs 20 crore lower than what we were expecting. So on the whole it was not too much of a disappointment.

What I take away from today’s fall is that most investors were expecting a larger dividend payout as compared to what the company has given this time around. Never the less, we are bullish on the stock because we see good traction and volumes to continue. Further more, we see the margins to improve from current levels.  We expect the earnings to be in the region of 16-18% over the next couple of years. So in that terms I think it remains one of our top picks in the two wheeler space.

Q: What exactly is your earnings forecast for FY13-14 and therefore your price target on Hero?

A: We are valuing the stock at around 15 times FY14 and we have arrived at a target price of about Rs 2,480, so the earnings estimate for FY14 is around Rs 165.

Q: Maruti and Bajaj Auto as well have been fairly week over the past two days. How would you approach them now?

A: Maruti is on our buy list considering that the volume traction has been decent and the recent launch of Ertiga and the success of the new Dzire and the new Swift models have been very good. This traction in volumes will continue and the margins are also expected to improve. This story is very similar to Hero Motocorp, because both have a very high contribution from rural areas. In that terms, even Maruti is in our buy list.

With respect to Bajaj Auto, I think we’ll have a market performer rating considering that it’s not fairing well in the domestic markets. Further, there are some pressures in the international markets where it has been operating. For example, Sri Lanka has seen an exceptional increase in customs duties and so in that terms I think Bajaj Auto will be a market performer for us.

Q: What about Ashok Leyland and M&M?

A: M&M also is a very nice story. We like the stock considering that it has a substantial exposure to utility vehicles (UVs). Its automotive segment is doing pretty well, it’s been growing at more than 20% year on year rate for quite a few months now. However, there is some slowdown on the tractor side. We’ll wait for the monsoons to unfold before taking a firm call on the tractor side of the business because the tractors have been disappointing with more than 10% declines for the last few months. So that has been a cause of concern on M&M and that’s the reason the stock has been under some pressure for some time now. So there is some pressure there but the stock still can be a hold for target price of around Rs 750-800.

For Ashok Leyland, the commercial vehicle space has been under ups and downs. The infrastructure activity has not been picking up, mining activity again has been on the lower side. Today again we see some news articles that Orissa might put a cap on iron ore mining. So there are substantial pressures in terms of commercial vehicle. So we don’t see Ashok Leyland doing that great and we have a market performer rating on that stock as well.