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Jul 12, 2012, 08.23 AM IST
Mahantesh Sabarad, Fortune Equity Brokers says, most automobile companies will announce a weak set of numbers for the month of June. He is positive on Tata Motors. “In the auto ancillaries, Bosch remains a good choice right now,” he adds.
Auto companies will soon declare their June sales numbers. In an interview to CNBC-TV18, Mahantesh Sabarad, senior vice president-institutional equity research, Fortune Equity Brokers says, most automobile companies will announce a weak set of numbers for the month of June.
However, he says, most auto companies’ FY13 earnings will be good.
Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.
Q: How serious is the position of inventory pile up in the auto space? Will you now be off the listed auto stocks, especially cars and commercial vehicles?
A: The issue is not too serious. If you look at the statements coming from the automobile companies then they are looking at shutdowns of about three days. Three days in a year is just about 1% of overall production capacity days lost. So, it’s not all that serious.
Partly the inventory pile up, which has happened off late, has got to do with the recent increase in the excise duty in the budget. So, what we saw was there was a little bit of preponed purchases that happened prior to the budget announcements and thereafter the demand is actually falling down. So, most of the automobile companies are actually using this opportunity to have a shutdown so that they can reduce the inventory. So, it is not all that serious.
Q: Auto sales numbers are coming out very soon. Are you expecting any kind of weakness? Will there be a correct indicator of the slightly medium-term trajectory?
A: Most automobile companies will announce a weak set of numbers for the month of June. We are looking at the industry growing in weak single digit in terms of overall growth rate, as far as the number is concerned. But among the exceptions you will see is Maruti. It will grow upwards of 25% primarily because last year they had a strike month and last year June the sales had collapsed for month over month something like 23% to 80,000 units. So that is the exception that we are seeing.
Q: No one is making a case that lack of production for three days in a year is going to bear heavily on the P&L. Do you have the confidence that it will be only three days? Would inventory pileup be a constant refrain over the coming months? How badly can demand be damaged and therefore are you reworking any of your earnings estimates on the fear of an inventory pile-up and lack of demand?
A: We are not fearing that there will be a lack of demand primarily because interest rates have been pulled down over the last year. So, on a year-on-year comparison basis, interest rates are lower. So that itself boosts a little bit of demand. We will have a base effect coming in. Last year, the sales had actually stated dropping during the festival season. So, the base effect will start catching up. Hopefully, if we are through with a normal kind of monsoon then we will see demand really picking up. The fear factor is not there as yet.
We may not see these production shutdowns being announced frequently hence forth again. So, we are not reworking the EPS estimates or profit estimates for the companies for lack of demand. But then there is a fear about cost rising. That means some of the material costs or auto component cost going up because of depreciated rupee. That fear might introduce that element of EPS downgrade. But automobile companies will have, if the demand environment is good, an opportunity to raise prices. Typically, June-July months are the ones when automobile companies exercise this as this tool, rising of prices. So, we should hopefully see most auto companies through in FY13 with good earnings.
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