Bajaj Auto, Maruti: StanChart's top picks in auto sector

In an interview to CNBC-TV18, Amit Kasat, auto analyst, Standard Chartered says, Bajaj Auto and Maruti Suzuki are his top picks in the auto sector. For Bajaj Auto, he has a target price of Rs 1,800.

Maruti unrest: State Labour Min suspects external elements Below is an edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Q: Let’s compare Bajaj and Hero MotoCorp. What have you taken away from the results? The Bajaj management speak was very positive, but it has always traded at lower valuations compared to Hero MotoCorp. How do you see the two stocks moving hereafter? A: There are a couple of things on Bajaj versus Hero Honda. Definitely, from a business model perspective, Bajaj’s business model is far more superior to Hero Honda. If you just looked from a quarterly perspective, the margin pressure and the realisation pressure for Hero Honda was very muted. This clearly shows that the volume is more on the lower end of each of the segment, which is a volume play with a lesser margin. If you look from a Bajaj perspective, the cost structure is very, very lean as compared to what Hero Honda has today. So, basically the margin trend going forward, if you just looked from a QoQ perspective, when the volume comes back from the export front for Bajaj, definitely that will keep on outperforming. On the valuation front, Bajaj is cheaper as compared to Hero Honda. But there are instances in the last five years where you have seen Bajaj trading at a premium or in line with Hero Honda. We believe, in the next three-four quarters, that can happen again. Q: How exactly are you reading the Manesar situation and any sort of FY13 estimates preliminary that you are working with? A: It’s an unfortunate event. The company has one of the best product portfolio both on the petrol and diesel. Diesel cars are more manufactured at Manesar plant, Swift and Ertiga will definitely have an impact in terms of the volume, if the issue is not resolved soon, next 10-15 days. As everybody knows that the total production there is 2,000 units a day. So, basically that will be the impact. That also means that the margins will be under pressure because the diesel portfolio, according to me, has a better margin as compared to the petrol portfolio. So, yes, there will be an impact. It’s too early to estimate what it will be. It depends upon how many days this issue will linger on. But basically 10-15% in terms of the earnings will definitely get impacted, if it doesn’t get resolved sooner. Q: Do you think there is some permanent damage that might come to Maruti’s valuations? This is becoming a recurring problem and it is a new high in terms of worsening of industrial relations. I can’t remember when we last heard of so many deaths in the course of industrial clashes or in the course of labour unrest and that too localised to one company. Do you think this is now becoming more than just a passing problem and so you will have to visit it on the valuations? A: I think it is yes. Definitely, on the valuation front, there will be deterioration. I believe that has already happen with the series of strike last year. If you look at Maruti, since it got listed, it use to trade to a premium to the sector and in line with the market. Today, if you look from that perspective, almost 15-20% discount is already there as compared to the market valuation. So, there is a deterioration that has already happened. With this new event, which has happened, whether it will deteriorate more, that is a call. But from the long only perspective, definitely this is a bigger issue because it is happening regularly now. The company will have to come out with a proper solution to sort out the issues now. _PAGEBREAK_ Q: Let me come back to that Bajaj-Hero Moto comparison. Do you buy the Bajaj management’s confidence that export issues will be sorted out? What are you giving them by way of earnings growth as well price target? A: From the earnings growth perspective, for FY13, we have a 14% earnings growth. We have a price target of Rs 1,800 on the stock from the current level. It is the top pick in the sector along with Maruti Suzuki. We have done a export report sometime back where we have really crosschecked each and every market, how the exports are panning for the Indian players. Definitely, the products, which Bajaj has in each of these markets, are not being looked down. They have been looked very good in terms of quality and reputation of the brand. There is a huge opportunity in the export market for Indian players. Bajaj being the first mover in that segment definitely will get impacted positively. If you just want to look from a run rate perspective, my belief is that they will have close to around 130,000-140,000 units on a monthly basis in FY13. That can inch up to almost 150,000-160,000 units in FY14. So, that’s a very good visibility which you can get from the business model. Also, domestically you can still see a 8-10% growth in FY13. On the low base, next year, depending upon how everything pans out in India, you will have a growth. Q: What are your expectations from Tata Motors for this quarter? A: From Tata Motors perspective, definitely operating performance will be under pressure. JLR volume growth story still continues, but basically the incentives in the current quarter were very high. So, basically it will eat away any benefit the company is going to get from the currency, a positive momentum on the operating cost. So, we have in line rating. Margins, at JLR, we are looking at 14%. On the stand-alone front, the commercial vehicle business is very positive for them where you are having the headwinds currently the M & HCV segment which has declined by almost more than 20%. On the passenger vehicle, there is a drag on the operating performance for the company. According to me 10-15% negative gross margin is for that segment. So, basically that will be a drag.