Low auto demand worries analysts, but feel situation may improve

Moneycontrol NewsFebruary sales of major auto firms slowed, largely due to demonetisation woes. Passenger vehicles overall posted steady numbers, but two-wheeler sales lagged as the rural market was still recovering from cash crunch issues. Analysts cite demand issues for the sector in general, but feel it may improve as cash situation gets better. Growth in passenger vehicles were largely driven by Maruti Suzuki, which reported 11 percent year-on-year growth, research firm Nomura said in a note. “Our channel checks indicate that footfalls were up 15-20 percent and industry retails growth was also in mid-teens,” the report added. In medium and heavy commercial vehicles, demand was soft despite pre-buying during the month, Nomura said. It maintained that industry demand would be weak in FY18F. Simultaneously, two-wheeler industry volumes’ fall was lower than its estimates. This was largely due to only 5 percent drop in Hero Motocorp as compared to its forecast of 13 percent decline. It estimates overall volumes to be down 1 percent YoY. The research firm remains positive on Maruti Suzuki (MSIL), with a buy call, due to its healthy model launch pipeline, strong waiting period and premiumisation portfolio. “While Gujarat plant started production from February, dispatches should begin from March 2017 onwards. Given strong demand, MSIL should keep operating at full capacity in FY18F,” the report stated. Motilal Oswal highlighted below estimate sales and slow exports. It believed that Mini segment declined on poor rural demand, while compact segment grew due to Baleno and Ignis sales. The brokerage maintains its buy call on the stock, which trades at 18.9X/15.6X FY18E/19E. Its consolidated EPS is at Rs 313/379.Nomura is negative on Ashok Leyland, with a reduce call, as it foresees rising headwinds to MHCV industry growth in FY18/19F due to price hikes on BS-IV emission norms, efficiency gains due to GST and rising competition from railways. Motilal Oswal too concurs with the opinion on pre-buying being higher, but demand and volumes being lower. It estimates FY17 growth at 4 percent, implying 21 percent growth. The brokerage maintains its buy call on the stock, which trades at 13.9 X/10.9X FY18E/FY19E EPS and at 8.35/6.5X EV/EBITDA. The brokerage house highlighted the positive surprise in tractors and UVs segments in case of Mahindra and Mahindra. “Tractor sales were above estimates at 15,007 units (v/s est 13,750 units), registering a 11 percent YoY growth (-6 percent MoM) on the back of good rabi sowing coupled with increase in MSPs,” the report added. It maintains its buy call on the stock currently.Meanwhile, for Tata Motors, the MHCV segment saw a growth due to pre-buying. Users are expecting a price increase due to BS-IV implementation from next month. It highlighted that the stock traded at 12.7x/6.4x FY18E/19E consolidated EPS respectively and maintained a buy call.On two wheelers, Motilal Oswal cites demonetisation impact as the reason behind lower volumes on Hero Motocorp. But, with improvement in the currency situation and consumer sentiment, volumes are set to rise, it says. It maintains a neutral stance on the stock, which trades at 15.8/15.5X FY18/19 EPS. In case of TVS Motor, it believes growth in mopeds and scooters partially offset fall in motorcycles and three-wheelers. “Strong moped growth is seen on the back of lower base of FY16 along with improved sentiments on the back of normal monsoon,” the brokerage house’s report added. It has maintained its buy rating on the stock.