Tata Motors, Maruti, Bajaj in top gear

STREET CUES

With some auto leaders throwing up good numbers and the sector showing no signs of slowdown, brokerages have rated Tata Motors (TML), Maruti Udyog (MUL) and Bajaj Auto (BAL) "outperformers".

IDBI Capital recommends "accumulate" on TML, which achieved the highest quarterly turnover in Q3FY07 for the past 15 quarters. In the last quarter, its net sales rose 37 per cent y-o-y to Rs 6,956.80 crore, driven by strong volume growth in both the commercial and passenger vehicle segments.

The strong growth will continue in Q4 too, as the full-year margins are estimated to remain at the levels seen in the last financial year.

The number of cars sold in the domestic market was up 31 per cent y-o-y, taking the nine-month sales to 3,68,126 units. The exports growth was moderate with exports of passenger cars faring badly in Q3FY07 mainly owing to lower sales in South Africa.

For the nine-month period, exports grew 11.4 per cent over FY06. TML is keen on taping markets in Russia, East Europe and South America.

Shahina Mukadam, research head, IDBI Capital Market, said, "TML's EBITDA margins for Q3FY07 stood at 13.5 per cent versus 15.4 per cent for Q3FY06.

However, Q3FY06 had an extraordinary other income of Rs 1,643 owing to profit on the sale of stake in its arm Telecon. Additionally, Q3FY07 had a forex gain of Rs 1,316.1 million compared with a forex loss of Rs 432.7 million in Q3FY06. We believe the margins for the full year will be similar to FY06."

Shahina's another pick from the auto space is MUL, whose Q3FY07 sales rose 18.2 per cent y-o-y to Rs 3,679.50 crore. The sales growth for the first nine months of FY07 over last year stood at 16.4 per cent, led by strong volume growth in the domestic passenger car mart, which posted growth rates of 18.9 and 18.1 per cent for Q3FY07 and the nine-month period respectively.

"Net sales represent the highest quarterly turnover achieved by the company in the past 14 quarters. EBITDA margins took a hit of 110 bps on higher employee costs and other expenses. The current price discounts 19.6x FY07E EPS of Rs 48 and 17.7x FY08E EPS of Rs 53.20. We expect strong volume growth to continue in Q4FY07, and the full year margins estimated to be slightly better than FY06," she said.

BAL is one of the favourite takes of a top US-based brokerage. The 3QFY07 margins were disappointing for auto major. Despite a far richer product mix the margins slumped 370 bps on a y-o-y basis to 14.2 per cent. Despite y-o-y growth in volumes, operating leverage was negated as other expenses rose owing to higher dealer subventions and sales promotion expenses.

"The stock at the current valuation of 17x FY08E earnings amply reflects the re-rating of the core auto business in the past 12 months and that the prices are in a strong growth trajectory of the insurance business," said an analyst of the US broking firm.

"Over the last three years, BAL has realigned its two-wheeler product mix in line with the market preference for motorcycles and has benefited. Its market share in the motorcycles segment has risen from 24 per cent in FY03 to around 34 per cent in FY07. We retain 'hold' for Bajaj Auto," he added.