Angel positive on Ashok Leyland, Hero Motocorp, Tata Motors

Angel Broking has come out with its report on "Automobile Sector Monthly Update - December 2012". The research firm prefers stocks that have strong fundamentals, high exposure to rural and export markets and command superior pricing power. Angel remained positive on Ashok Leyland (AL), Hero MotoCorp (HMCL), Mahindra and Mahindra (MM) and Tata Motors.

Automakers posted subdued numbers for December 2012 as demand continues to remain weak due to high interest rates, inflation and slowdown in economic activity. The weakness was prevalent across the product segments with the medium and heavy commercial vehicle (MHCV) segment being the most impacted. However, utility vehicles (UV) and light commercial vehicles (LCV) defied the general slowdown and sustained their growth momentum. Among auto majors, while Hero MotoCorp (HMCL) posted better-than-expected volumes; Ashok Leyland (AL) and Maruti Suzuki (MSIL) registered a lower-than-expected performance. Mahindra and Mahindra (MM) too witnessed slower growth on account of weak sales in the tractor and pick-up segments. Going ahead, we expect the demand scenario to remain challenging in 4QFY2013 as slowdown in economic growth coupled with higher interest rates and fuel expenses continue to dampen consumer sentiments.

TTMT recorded a sharp decline in volumes by 20.3% yoy (1.4% mom) led by continued weakness across the product segments excluding the LCV segment. MHCV sales witnessed a sharp decline of 44.3% yoy led by weak industrial activity. The passenger vehicle segment too witnessed a poor performance with volumes declining by 50.5% yoy (20.6% mom). LCV sales however continued to witness strong momentum posting a better-than-expected growth of 19.9% yoy (6.8% mom).

AL posted lower-than-expected volumes primarily due to poor MHCV sales (down sharply by 34.5% yoy) and unexpected fall in Dost volumes (declined by a steep 28.2% mom).

MSIL registered a slightly lower-than-expected volume growth of 3.2% yoy (down 7.8% mom) due to 11% yoy decline in export volumes. The domestic sales however grew by a healthy 5.9% yoy driven by strong growth in the compact (8.9% yoy) and the super compact (42.3% yoy) segments backed by Swift and Dzire respectively. Nonetheless, Ertiga volumes came-off significantly (down 26.8% mom) during the month. The Mini segment too registered a decline of 15% yoy (10.6% mom) despite the launch of Alto 800, due to weakness in demand for petrol cars.

MM reported a muted volume growth of 1.4% yoy (down 12.5% mom) as tractor sales posted a higher-than-expected decline (down 10.5% yoy) despite the lower base. The automotive segment too slowed down (grew by 5.9% yoy) due to flat growth in the pick-up segment and 9.3% yoy (24.1% mom) decline in the threewheeler segment. Nevertheless, the PV segment posted a strong growth of 17.7% yoy (down 7.5% mom) driven by the new launches XUV5OO, Quanto and Rexton.

Two-wheelers and three-wheelers:BJAUT reported an in-line volume growth of 12.5% yoy (down 7.6% mom) driven by a strong growth in domestic sales (17.2% yoy) led by new launches - Pulsar 200NS and Discover 125ST. HMCL registered a better-than-expected growth of 7.8% mom during the month possibly due to the inventory replenishment at the dealer end. TVSL posted weak sales with total volumes registering a decline of 8.3% yoy (9.1% mom), primarily due to 32.2% yoy (18.9% mom) decline in scooter sales. Motorcycle sales however reported a 6.3% yoy growth led by the recently launched Phoenix.

Outlook: We believe the long-term structural growth drivers of the Indian automobile industry such as GDP growth (leading to increasing affluence of rural and urban consumers), favorable demographics, low penetration levels, entry of global players and easy availability of finance are intact, which should support a 10-12% CAGR in auto volumes over FY2012-14E. As such, we prefer stocks that have strong fundamentals, high exposure to rural and export markets and command superior pricing power. We remain positive on AL, HMCL, MM and TTMT.

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