Uncelebrated festive season for auto sector: Angel Broking

Angel Broking has come out with its report on auto sector. The research firm expects the two-wheeler segment to grow at a healthy rate; however, demand in the passenger vehicle (PV) segment is likely to remain subdued as rising loan rates and high fuel costs continue to dampen consumer sentiments. 

During the festive month of October, automobile sales reported a muted performance on account of weak demand environment across most segments. The tractor and medium and heavy commercial vehicle (M&HCV) segments, however, defied the general slowdown by posting strong growth. Hero MotoCorp (HMCL), Bajaj Auto (BJAUT), Maruti Suzuki (MSIL) and Tata Motors (TTMT) posted volume numbers that were not in tandem with expectations. Mahindra and Mahindra (MM) was an exception as it managed to sustain its impressive volume performance. Going ahead, we expect the two-wheeler segment to grow at a healthy rate; however, demand in the passenger vehicle (PV) segment is likely to remain subdued as rising loan rates and high fuel costs continue to dampen consumer sentiments. 

Tata Motors (TTMT) registered a modest 5% yoy increase (down 13.7% mom) in its total sales as the commercial vehicle (CV) and passenger vehicle (PV) segments reported a subdued performance. The CV segment grew by 6.3% yoy (down substantially by 18.4% mom) as light commercial vehicle (LCV) sales witnessed slowdown in growth during the month. M&HCV volumes, on the other hand, grew by strong 14.6% yoy (down 8.6% mom). The PV segment registered marginal 2.9% yoy growth (down 4.6% mom), led largely by growth in Nano (up 26.2% yoy) and utility vehicles (22.8% yoy) volumes.

Maruti Suzuki (MSIL) posted extremely poor volumes for October 2011, as production during the month was impacted by the strike at Gurgaon and Manesar plants. The strike at both the plants resulted in a production loss of 40,000 units, as a result of which total volumes declined by 53.2% yoy (35% mom) to 55,595 units. Domestic volumes were down by 52.2% yoy (34.7% mom) and exports volumes fell by 63.6% yoy (38.7% mom). All sub segments of the company witnessed a steep mom and yoy decline in volumes.

Mahindra and Mahindra (MM) reported strong 24.8% yoy (6.6% mom) growth in total volumes to 73,344 units, supported by robust 31.1% yoy (29% mom) and 20.3% yoy (down 6% mom) growth in tractor and automotive sales, respectively. In the tractors space, domestic and exports sales recorded impressive growth of 30.5% (29.8% mom) and 46.1% yoy (13.2% mom), respectively. Within the automotive segment, the four-wheeler pick-up segment continued its strong growth traction and witnessed 41.2% yoy (down 2.4% mom) growth. LCV and M&HCV sales grew by 42.4% yoy (20.1% mom), whereas Verito continued its strong run during the month. Automotive exports, however, posted modest 7.5% yoy (down 28.2% mom) growth.

Two-wheelers and three-wheelers: BJAUT reported moderate 6.6% yoy (down 5.4% mom) growth in total volumes, as civil unrest at Pantnagar affected production leading to production loss of about 25,000 motorcycles. HMCL reported marginal 1.3% yoy growth in total volumes to 512,238 units. On the retail front, however, the company posted the highest-ever sales of over 650,000 units, thus registering strong double-digit yoy growth.

Outlook: Considering the near-term macroeconomic challenges, we expect the auto industry to register moderate volume growth of 12-13% for FY2012. However, we believe low penetration levels coupled with a healthy and sustainable economic environment and favorable demographics supported by increasing per capita income levels will drive long-term growth of the Indian auto industry. As such, we prefer stocks that have strong fundamentals, ability to deliver a strong top-line performance and are available at attractive valuations. We continue to prefer companies with a strong pricing power and high exposure to rural and exports markets.

Quarterly Shifts by Morgan Stanley

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