Margin concerns persist due to high input costs, but sector is banking on continuation of strong demand to boost sales and profitability.
Robust demand on the back of strong economic growth and rising incomes, as reflected in the sales volumes in May, should enable the domestic auto sector to grow over 15 per cent in 2010-11. Despite production constraints and supply issues, auto companies saw their sales volume jump an average 30 per cent year-on-year in the first two months of the current financial year.
In addition to pent-up demand, affordability and new launches over the past couple of months, what also helped most companies post a strong show in May was the marriage season. Notably, some of them like Maruti and Hero Honda posted their highest ever monthly sales. How demand moves in the lean months of June and July will decide whether manufacturers will offer discounts to maintain volumes.
While thus far manufacturers have been able to pass on the rise in raw material costs to consumers on the back of a strong demand, any drop in demand and heightened competition will limit their choice on that front.
We review the performance and prospects of listed players in the two-wheeler, passenger vehicle and commercial vehicle (CV) space:
Two-wheelers
New launches, coupled with a low base and festive (marriage) season, helped India’s listed two-wheeler makers post a 33 per cent year-on-year jump in volumes for May. While a low base helped Bajaj Auto post over 60 per cent increase in sales in May over the same month last year, its sales were lower by 4.5 per cent vis-à-vis those achieved in April due to capacity constraints.
TVS Motors also saw its May sales increase 30 per cent, driven by incremental sales of the Jive bike and Wego scooter, and is expected to top two million in sales for the financial year. While Hero Honda’s volumes are expected to grow 15 per cent to reach five million units for the year, Bajaj is aiming at four million units on the back of higher sales of its recently-launched models, Discover 150 and Pulsar 135. Raw material, as a percentage of sales, is likely to increase but will be offset partially by volume gains and excise breaks, since all three companies have a unit in tax-free zones.
At current levels, Bajaj Auto seems to be the best bet of all the three due to new launches, market share gains and higher volume growth.
| ROBUST SALES, MARGIN WORRIES | |||||||
| In Rs crore | Sales | Chg (%) | Ebitda (%) | Chg (bps) | PAT | Chg (%) | P/E (x)* |
| Ashok Leyland | 2,939 | 69.0 | 12.9 | 152.0 | 222.0 | 112.0 | 15.4 |
| Bajaj Auto | 3,399 | 3.0 | 22.9 | 90.0 | 531.0 | 12.0 | 15.3 |
| Hero Honda | 4,122 | 7.7 | 16.7 | -30.0 | 599.0 | 11.8 | 15.9 |
| Maruti Suzuki | 8,424 | 12.3 | 13.2 | -192.0 | 656.0 | -4.5 | 12.3 |
| M&M | 5,304 | 18.0 | 15.9 | 105.0 | 570.0 | 37.8 | 16.2 |
| Tata Motors | 12,229 | 36.2 | 10.1 | -275.0 | 597.0 | 49.2 | 12.4 |
| TVS Motors | 1,192 | 11.1 | 5.9 | -30 | 57 | 140 | 13.1 |
| All figures are for March 2010 quarter, % change is q-o-q *PE is based on 2010-11 estimates | |||||||
| HIGH ON DEMAND | |||
| Units sold | May 2010 | % chg y-o-y | % chg m-o-m |
| Hero Honda | 435,933 | 13.90 | 17.30 |
| Bajaj Auto | 299,442 | 61.60 | -4.50 |
| TVS Motors | 156,980 | 31.60 | 6.70 |
| Maruti | 102,175 | 27.90 | 9.80 |
| Tata Motors | 56,779 | 41.30 | -0.70 |
| M&M | 45,362 | 49.40 | 7.50 |
Passenger vehicles
Maruti Suzuki led from the front, breaking the five-digit monthly sales barrier and posted a 27 per cent growth in domestic sales. The company is looking at alternative markets to sell the A-Star, as the withdrawal of the scrappage scheme saw its exports drop seven per cent, compared to April sales. While the company retained its 50 per cent market share, which had dipped earlier due to new launches from competitors in the A2 segment, competition will only get tougher as the Nano and recent launches eat into its share.
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For Tata Motors, while the domestic business disappointed due to higher raw material costs, operational improvement at its European subsidiary, JLR, helped it to post higher revenues and profits. Despite new launches, domestic sales dropped sequentially by seven per cent due to lower Indica and flattish sales of the Nano. Expect the small car’s sales to move up as production at the new Sanand plant picks up. While the economic revival in the US and European countries will have a strong influence on Tata Motors’ fortunes, Maruti could see upsides from these levels.
Commercial vehicles
Tata Motors put up a strong show in its bread-and-butter commercial vehicle space, growing 60 per cent year-on-year and five per cent sequentially. Light CV despatches, too, were higher by 23 per cent, but the going in this high-volume segment could get tougher as existing and new launches eat into Tata Motors’ market share.
However, given its dominant position and industrial activity picking up, expect the company to post strong volumes in all the sub-segments. Mahindra & Mahindra recorded strong tractor sales, up 29 per cent due to pre-monsoon demand. While it trades at a higher multiple to peers, a sum-of-parts valuation translates into 25 per cent returns from these levels.