Bullish on 4 wheelers; like Maruti, Leyland: PL's Korde

Anuj: What is your sense on sales data due to the unseasonal rains, so on companies like Bajaj Auto and Hero Motocorp for the last couple of months?

It is tough to give an impact but I guess it will impact Hero more than Bajaj simply because Bajaj does not have as much of an exposure to rural India as Hero has. And Hero should see, my estimate for is basically they should see a decline of 5-7 percent in their sales, so about Rs 5 lakh is what they should be doing for March but growth rate will be weak even in the June quarter. For Bajaj it will be a combination of weak off take on the export side as well as the hire base for three wheelers and some of the newer models are yet to be launched which will eventually help them up their volumes but nothing on the interim. We have to see on the rural side whether any steps are taken for mitigating the loss that we have seen for farmers or whether there is some potential positive that can come in over the next few months where some announcement comes in to boost the demand over there. At this point of time, it will be weak but difficult to quantify at this point of time. Low single digit is what we are looking at for two wheeler growth in the industry in FY16 and that too will be driven mainly by scooters and the motorcycle segment will continue to suffer.

Sonia: For Bajaj Auto particularly, how are you viewing the new launches for the company and is there a fundamental shift in the two wheeler space to say foreign brands and hence there is a larger more fundamental impact on or rather weakness that you can expect on Bajaj Auto?

A: Not to a great extent. What is impacting them is mainly the trend where scooter sales are growing much faster. If we look at the brands then Splendor and Pulsar are still the leaders in their own respective segments. It is on the higher cc side where some of the foreign brands typically do well. What has been the additional surprise is TVS doing relatively better even in motor cycles, so that has been a bit of a change from the normal story in the two wheeler space that we have been seeing over the past 3-4 years where Honda, Bajaj and Hero were grabbing all the eye-balls. But, even TVS doing well in motorcycles has been a pleasant surprise.

Anuj: Let us talk about Tata Motors and the rights issue. What is the math that you have done on that and what is your call on the stock?

We will have to wait and see at what price the issue does take place, but I would presume it is a 4.5-5 percent dilution that we will be seeing in the overall equity base for Tata Motors. I am viewing this development a positive because they would be needing money for their research and development (R&D) plans and their capital expenditure (Capex) plans and there is also some debt reduction plan on the anvil. So, over the near-term while it will not really change the earnings simply because the interest cost will go down while equity base will increase, from a long-term perspective it is the strengthening of the balance sheet which the stand alone entity needed, so, it is quite timely at this point of time. The gross debt equity should come down from about 1.4x to about .85x for the stand alone business post this rights issue so that is also another positive from a more structural point of view.

Anuj: What about Maruti? What kind of numbers are you expecting for monthly sales for March?

A: Maruti, I am looking for bout 10 percent growth, so they should be doing somewhere about 120-123 thousand units.

Sonia: For FY16, which would be the space that you would place you bets on in terms of highest growth?

Highest growth on four wheelers will obviously come in on the commercial vehicle side because of the lower base. So, Ashok Leyland should see a 25 percent kind of growth in FY16. On the passenger vehicle side I am putting my bets on Maruti and Maruti should be seeing a 12-13 percent growth coming in FY16 and they should be able to maintain this target based on their new launches that they are planning over the next few years.

Anuj: How worried are you about M&M and the impact of unseasonal rains especially on the tractor segment?

M&M is a bit, the demand on the tractor side is likely to remain weak over the next few quarters, the same logic that went into two wheelers applies to M&M’s tractors as well. But, they are also looking at launching new utility vehicles including refreshers, brand new vehicles and some variants. So the way I look at M&M is that FY16 is a year when we will probably see the base being built for growth in future years. So, I am not expecting a big growth for M&M or a big turnaround for M&M in FY16 but FY17 onwards things will be much better when we will be out of the tractor cycle. Probably the bottom will be reached in the tractors around the June quarter and after that we will start seeing some growth coming in, in the second half. So FY17 is a year when we should be looking at M&M more closely. If any action is to be taken on M&M it is through ignoring FY16 and looking at the long term prospects FY17 onwards which look to be good, from a near-term perspective though things are a bit subdued for them.

Sonia: So, overall if you could leave us with some of your picks, your top-picks in the Auto space. What are you telling your clients to buy?

I am overweight on the auto space. My top buys are Maruti and Ashok Leyland and third in line is Tata Motors. So these are the three stocks that I am very optimistic on from a near-term as well as a long-term perspective.

Anuj: And what about your sell-calls?

I do not have any sells, I have accumulates on the two wheeler space where the upside is about 5-6 percent.