Equity | April 06
The trend seen in February has slightly weakened in March. The PV sales have witnessed a slight slowdown which we think is temporary and will gain momentum in FY 16. MHCV industry has been outperforming since the start of FY 15 and continued its trend in March as well. While scooters segment remained strong in the 2W segment, we are seeing an evident slowdown in motorcycle segment given weakness in the rural economy. On the PV side, the likes of Maruti Suzuki had a disappointing month as diesel segment and exports underperformed, while Tata Motors triumphed on new launches. On the two wheeler side, Hero surpassed our expectations bucking the trend of the industry. We expect this to have come on the back of festive season in some of the states. TVS which had been one of the outperformers of the year so far, continued to grow but at a lower rate than before. 2W segment has been affected due to weakness in the rural economy on the back of weak agricultural output and unseasonal rains. On the MHCV side Ashok Leyland has been a resilient performer with MHCV sales putting up a very strong show thus indicating revival in MHCV industry. Even Tata Motors posted strong MHCV sales performance in March growing at ~20%. With new launches coming from most of the auto companies in FY 16 and with new government expected to come up with reforms and an expected interest rate cut may trigger a strong movement in auto sales in FY 16. We like Tata Motors on the JLR story and ongoing turnaround in the MHCV industry, Maruti on the boom in the PV segment and new vehicle launches and Hero on its market leadership and expected revival in rural markets. We also like Ashok Leyland on robust MHCV story. The current government’s emphasis on the ‘Make In India’ theme will yield rich dividends to the CV players in terms of profitability as the GOI has increased the customs duty to 40% from 10% on CVs which would curb imports and foster local procurement of raw materials. We are concerned about the prospects for Bajaj Auto given the weak performance in domestic motorcycle business and recent development in Nigeria, one of the biggest export markets for Bajaj. We are also concerned about M&M on underperformance in both of its segments. TVS has also started showing some signs of weakness in volumes, though it needs to be watched if there is a recovery as compared to last two months.
Ashok Leyland – (BUY, TP – Rs 80) – Marching ahead
• MHCV sales grew by 29.9% yoy and 21.8% mom to 10,027 units as we are seeing a strong turnaround in the MHCV industry. Also the GOI is planning to focus on new projects along with increased concentration on stuck up projects.
• LCV sales too grew by 6.4% yoy to 2,727 units and 7.7% mom as things start to look up in the LCV segment too.
• We expect FY 16 to be very strong on the back of revival in infrastructure activities and overall demand scenario. LCV segment will follow suit but with a lag. LCVs are already showing reduction in drop in sales.
Hero Motocorp – (BUY, TP – Rs 3,024) – Performance above expectations
• Hero’s sales grew by 1.5% yoy and 9.7% mom to 531,750 units above our expectations of 5,10,000 units. On a YTD basis, the sales have grown by 6.2% This was a surprise to one and all considering the weakness in 2W industry seen over the past few months.
• This growth can also be associated with the new year festive season in some of the states such as Maharashtra, Karnataka and AP.
• Going forward, we think there will be some pressure on Hero’s sales as well in the rural markets as 50% of its sales come from there. But, strong market leadership position, well spread network and popularity of famous low ticket size models may act as a cushion in difficult times.
Mahindra and Mahindra – (NEUTRAL, TP – 1,274) – FY15 ends on a bitter note
• M&M sold 45,212 units in the auto segment, a de-growth of 12% yoy. Passenger UV+ Verito sales in the month de-grew by 10% yoy to 21,030 units. This was due to the structural issue related with the absence of M&M in the compact SUV segment. In the Q1 segment, M&M has lost market share of 600-700 bps in FY 15 to the likes of Duster, Ecosport, Ertiga and Mobilio. The company is planning to launch two SUVs in FY16 to cater to this segment. These launches according to us will face stiff competition from the existing competitive products and the new launches (one from Maruti). In FY 15, passenger UV segment has de-grown by 10%.
• 4W pick-up segment which includes Gio, Genio and Maxximo along with other pickups like Bolero Max, de-grew by 19% yoy to 14,279 units
• 3Ws de-grew by 24% yoy to 4,808 units during the month which was again a volatile show. In FY 15, 3W degrew by 9%.
• Exports grew by 28% yoy while in FY15, its has grown by 2% indicating its unstable growth pattern. March saw a better growth on the back of traction observed in Africa and S America. Going forward exports may grow on the back of new order from Philippines police to the tune of 1,470 SUVs.
• FES segment posted a drop of 31% yoy to 12,254 units due to delayed rains and sowing, delayed paddy crop, low yield and low prices of sugarcane, cotton and paddy, weak rabi crop and unseasonal rains in March in vital states like Rajasthan, Maharashtra, UP and MP. After posting a stupendous growth of 21-22% in FY 14, the tractor industry has witnessed a lull in FY 15. YTD decline for tractors is at 13%, much higher than anybody’s expectations. Performance in FY 16 depends upon factors such as rainfall, MSP growth, infrastructure development in rural areas and overall uptick in the rural economy.
Maruti Suzuki – (BUY, TP – Rs 4,015) – Weak March.. an aberration
• March was a weak month for Maruti on the back of weak exports show and some pull back in the diesel car segment. Total sales declined by 1.6% yoy to 1,11,555 units
• The small car segment comprising Alto and Wagon R remained flattish at 40,159 units, thus snapping the declining trend since last month. This was due to petrol prices still remaining stable. YTD fall has narrowed to just 2.4%
• Compact vehicle segment sold 38,710 units, a decline of 12.5% yoy. The decline may be because the narrowing of gap between petrol and diesel prices. YTD growth has been strong at 12.6%
• The new launch of Ciaz sold 4,251 units, which was a stable performance.
• Domestic sales grew by 1.4% yoy, while exports de-grew by 29.3%, on the back of missing a shipment.
• Ertiga’s UV segment in the month fell by 4.3% yoy to 6,218 units, while the vans segment has been showing good growth, which in March was 20.7% to 11,768 units after putting up a dismal show in FY 14. YTD growths in UV and vans segments are 11.6% and 26.3% respectively.
• In FY 15, MSIL’s total sales have grown by 11.9%.
TVS Motor – (NEUTRAL, TP- Rs 230) – 2W Growth tapering down
• TVS sold 211,122 units in March which was a growth of 7.4% yoy and 3.2% mom. This is a reduction in growth rate as compared to previous months.
• Motorcycles sales grew by 13% yoy at 76,936 units, while scooters sales grew by 14% yoy at 54,666 units on the back of strong sales of Jupiter and existing Scooty and Wego models.
• 3 Wheelers sales growth resumed to a strong 36% yoy to 10,884 units.
• Exports sales grew by 42% to 42,637 units.
• In FY 16, we expect the slowdown in 2W sales to impact TVS as well. The new 100 cc motorcycle launch will face tough competition from the market leader Hero in that segment. There will be a tapering down of 2W sales on the back of high base of FY 15, thus bringing down the overall volume growth rate. Absence of opening of any significant permits on the 3W side may impact TVS’ 3W sales. Exports and scooters remain the strengths of TVS in FY 16 as well.
Tata Motors – (BUY, TP – Rs 663) – Strong growth in cars in line with expectations
• Tata Motors sold 52,479 vehicles in March, sequentially 18.7% and a yoy growth of 2.5% on a high base of last year’s March
• Commercial vehicles sales for the declined by 4% yoy which is still a small number considering the high base of last year. LCV sales declined by just 18% yoy while MHCV sales reported a huge growth of 204% which is a great sign pointing towards strong revival. Recovery in MHCV sales can be derived from some pick up in industrial and infrastructure activities in the country.
• Passenger vehicle sales impressed and surprised one and all by growing 19% yoy. Car sales grew by 33% yoy and UV sales dropped by 28% yoy. The success of Zest and Bolt has resulted into such strong car sales, while UV sales have underperformed due to competition in the compact SUV segment.