Volume growth for 2-wheelers to be back by Jan: StanChart

Amit Kasat of Standard Chartered Securities expects volume growth of two-wheeler vehicles to pick up from January onwards. "Inventory will not be a bigger issue for the two-wheeler industry going forward because it gets readjusted very fast according to readjustment in their production schedules," he said in an interview to CNBC-TV18.

Meanwhile, India's largest two-wheeler maker Hero MotoCorp's second quarter net profit declined 27% from a year ago (down 28% sequentially) to Rs 441 crore, hurt by overall slowdown in sales. StanChart Securities has a sell rating on this stock with a target price of Rs 1,800. The company is seen losing its market share to other key players like Honda and Bajaj at least for six months. Mahindra & Mahindra (M&M) will announce its second quarter earnings today. Kasat expects the utility vehicle maker to register strongest numbers in the auto sector in the current quarter. "Profit will be Rs 850 crore, which is double digit growth on the year on year basis as well as on the sequential basis. Margins will be flattish," he elaborated. Below is the edited transcript of Kasat’s interview with CNBC-TV18. Q: What did you take away from the Hero MotoCorp numbers? A: Their quarter numbers were one of the worst. From the cost perspective, it was much higher; also there was a decline in volumes in this quarter. Inventory gets piled up before the festival season; this has been an issue for the whole two-wheeler industry. It may continue in terms of volume for the next couple of months. The retail numbers will be very strong, but wholesale numbers will be lackluster for the company. Having said that, inventory will not be a bigger issue for the two-wheeler industry going forward because it gets readjusted very fast according to readjustment in their production schedules. From January onwards, my belief is that volume growth for the company and for the industry will come back. Q: What is your rating on the Hero stock right now and the kind of price target you have? A: For the last two years we are sellers on the stock. We have inline rating with a target price of Rs 1,800; this price has been revised from Rs 1,900 earlier. Q: Do you think Hero will continue to lose market share to Honda as has been the case for the last few months? A: There is a shuffle happening from the market share perspective. Market share swing is happening between top three players and other players are fringe players in the industry. As a leader, there will be a swing from Hero to Honda to Bajaj at least for the next six months. This is because the base effect for Hero catches up in the next few months whereas the base effect for other two players will not be as high. From a relative perspective, market share swing will happen. Q: If you had to choose between Bajaj and Hero today, which one would you go for?
A: As always I will go with Bajaj because Bajaj is becoming an aspirational company and the products are becoming aspirational too. So, between aspirational company and aspirational products, where Bajaj has been positioned right now, it definitely has an upper hand in the current market.
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Q: Where does this leave TVS Motors?
A: TVS has completely lost out. There is a need of a technical partner so that they can come out with products at a frequent interval. Since the Suzuki joint venture breakout the company has not come back. It is back in terms of new product launches, but in the current scenario, competition is much higher from Yamaha and Honda, so the company is loosing out its own control on all the three segments it is present in. Q: We have M&M reporting today, what are your expectations?
A: M&M is going to report one of the strongest numbers within the auto space in the current quarter. My expectation on the profit is Rs 850 crore, which is double digit growth on the year on year and sequential basis. Margins will be flattish, but the company has delivered growth from the volume in the second quarter. Q: What is your rating on the stock and the price target here?
A: At the current price, I have an inline rating on the company with a price target of Rs 780. Q: Do you think the worst is over for Maruti?
A: Yes I think. Maruti is my top pick in the auto sector. In the second quarter, the numbers will definitely be lackluster that is known to the market. This company should be tracked from volume and margin perspective from third quarter onwards. There is a lot of pent up demand in the system for the passenger car industry, which was struggling for the last 12 months. FY14-15 may be a good year for the passenger car industry. Maruti's product portfolio is a balanced portfolio both on petrol and diesel where the competition is struggling currently. Therefore, Maruti can gain market share. Q: What is happening in the commercial vehicle space now as things have been quite difficult for Ashok Leyland?
A: In the truck segment there is a problem. Earlier, I had said that I see a risk on the M&HCV segment and it can de-grow between 5 percent to minus 15 percent this year. So, the view still stands. This is the only segment within the auto, which is directly correlated to the economic activity happening in India. Till the time improvement is seen happening in there, we are not going to see a revival in this segment. So, we may see pain in volumes for these companies, at least for the next six months. Q: Exide came out with fairly poor numbers this time. Since you track autos what do you think is going wrong? Will this pain continue?
A: The pain may continue for another couple of quarters. As a market leader, the company is very keen to get market share that they lost in the last two years in replacement space. The lowest market share, which they hit a couple of quarters back in the replacement segment was 28 percent. By the end of the second quarter, they gained almost 31 percent. They will target between 35-36 percent of the market share. As a market leader, their strategy is that they are giving away profitability to gain market share. Once we hit the market share hurdle, which the company has set for itself, profitability will follow and that will start only in FY14.