Neutral on Hero Moto; buy Tata Motors on dips: Centrum

In an interview to CNBC-TV18 Ajay Shethiya of Centrum Broking shared his outlook on auto stocks and the strategy to play the sector.

He is bullish on Tata Motors and recommends buying the stock on dips.

Meanwhile, the broking firm currently has a neutral rating on Hero MotoCorp but the stock may get upgraded to a buy rating going ahead.

"Considering the feedback received from dealers, we might upgrade the stock because the expectations are quite low in terms of the growth in FY14. The apprehension that it would significantly dilute the brand image post split of Honda doesn’t seem to be the case," he explained.

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Below is the verbatim transcript of Ajay Shethiya’s interview on CNBC-TV18

Q: What could be the reason for the fall of Tata Motors? Is it a good time to buy the stock?

A: In last couple of sessions, the stock has corrected quite a bit. On the domestic side, things are not really great. The MUV and SUV sales that are traditionally in the month of March, one of the strongest, doesn’t seem to be quite strong. Most of the dealers are expecting the volume numbers to be lower on a month on month basis. On the Jaguar Land Rover (JLR) front, there was some concern in terms of fuel efficiency norms coming from China, impacting the sentiments.

When we spoke to the management, we came to know that all the new products that are launched so far, comply with the fuel efficiency norms. Also, the future products that are expected to be launched, would comply with the fuel efficiency norms. So by and large, we continue to remain positive on the stock and feel that correction is a good opportunity to get in.

Q: How would you be placed on Hero MotoCorp which is at 52 week low? What is your expectation for their monthly March sales figures?

A: On a broader basis, we expect the volume numbers to be weak across the major categories both on a year on year basis as well as on a month on month basis. We recently interacted with more than 40 dealers on a one-on-one basis covering Gujarat and Maharashtra. According to the indications that we are getting, MUV and SUV space continues to be worst hit followed by passenger vehicles and then two wheelers. Volume expectations are definitely on a muted note as far as March is concerned.

Going forward, given the current pessimism, most of the dealers are indicating a mid, single digit growth across the vehicle categories. As far as Hero MotoCorp is concerned, though we have a neutral rating on the stock, the interactions with dealers largely mean that the franchise for Splendor and Passion remain quite strong largely driven by two facts, (1) it is quite low in terms of maintenance and (2) the resale value for Splendor and Passion is still quite strong. For example, even a 2000 year model of Splendor would fetch anywhere between Rs 16,000-17,000.

Considering the feedback recieved from the dealers, we might upgrade the stock from neutral to buy largely because the expectations are quite low in terms of the growth that is expected in FY14. Secondly, the apprehension that it would significantly dilute the brand image post split of Honda doesn’t seem to be the case. So, we would definitely look at upgrading the stock from neutral to buy.

Q: Where would you keep your price target if and when you do upgrade Hero MotoCorp?

A: We are currently working on our target, but the expectations were quite low as far as FY14 growth estimate was concerned. So by and large, keeping a two-three percent volume growth and also considering the fact that from FY15 onwards there would be no royalty impact, structurally, the profitability would turn much better. We would put somewhere in the range of Rs 1,700-1,750. Though we are working on the numbers, but rationally, we would be closing our target somewhere in that range.

Q: Mahindra and Mahindra (M&M) has always managed to surprise in terms of monthly sales figures at least in the past couple of months. What is your expectation from them this month and would you be a buyer on M&M at current levels?

A: We have got a neutral rating on M&M. We have been maintaining our view for almost four-five months now purely because interaction indicates that there has been a significant slackening in the light commercial vehicles (LCV) category over the last two-three months. Also, the utility vehicle (UV) segment that was doing extremely well thus far growing at 25-30 percent, is likely to moderate and retrace back to the normal range of 9-10 percent. This is because there are no significant product launches expected in the next 12-15 months.

There would also be high base effect that would come through and so we feel the growth rate would moderate. On top of that, the LCV category that was doing extremely well so far, is also seeing a considerable slackening over the last two-three months. The tractor segment is also moving quite slowly and the discount levels are still at higher levels. So, we would continue to maintain our neutral stance on M&M at this point in time.

Q: How would you move on Maruti now because most brokerages have it as their top pick in a relatively slow market, will it do better? Since the beginning of February, the stock has moved from Rs 1,600 to Rs 1,200 and that’s quite depreciation, how would you approach it?

A: Most of the auto stocks have seen a significant correction over the last few months. Maruti, the only positive thing is some amount of petrol demand that is coming back where Swift and Dzire still have waiting period of 16-25 days at least on the petrol side. This is also on account of the shortage in supply that was seen for the petrol models. Secondly, the inventory levels continue to remain quite normal.

Most of the dealers have seen some increase in the inventory levels and others have taken steps and corrected their inventory levels. Thirdly, we also interacted with Honda dealers regarding Honda Amaze, likely to be launched on April 11. Initially the company would like to go slow and are targeting 5,000 units on monthly basis. This will have a direct impact on Maruti Dzire which is doing 17,000-18,000 units. So, there was apprehension that Amaze would take a significant share from Dzire, but we feel that the impact would be limited to 2,000-3,000 units on monthly basis. Given the kind of strong franchise it has, and also the stock prices corrected, we would continue to maintain our buy view on the stock.