SSKI: Reiterates 'Outperformer' on Auto majors

The automobile industry has begun FY07 on a positive note with strong volume growth (19%yoy YTD) across segments; more importantly, the growth momentum appears sustainable going forward.

SSKI estimates factor in the impact of higher interest rates and fuel price hikes. They believe the impact of further rise in interest rates and fuel price hikes will not pose a threat to our demand estimates.

Among their top picks, they expect strong volume uptick to be a major growth driver for Maruti Udyog (MUL), Tata Motors and Bajaj Auto while M&M is a conglomerate play with tremendous value being generated in its subsidiaries.

Earnings visibility, capability to withstand margin pressure, position of strength in the respective segments and strong growth witnessed in key subsidiaries make MUL, Tata Motors, M&M and Bajaj Auto good
buys at the current valuations.

Industry witnessing strong growth: Auto manufacturers have posted impressive 19%yoy volume increase over April-May 2006; we expect 15-18% volume CAGR for key segments (cars, motorcycles and CVs) over FY06-08.

SSKI estimates factor in the impact of higher interest rates and fuel price hikes. They believe the impact of further rise in interest rates and fuel price hikes will not pose a threat to our demand estimates. However, steep increases in input costs going forward could result in frequent price hikes by manufacturers and thereby lead to deferred purchases.

Earnings momentum remains intact: They foresee good volume growth for our top picks over FY06-08, which they expect to translate into strong 17% earnings CAGR for them.

Earnings of Tata Motors and M&M would be aided by good growth witnessed in key subsidiaries. These players have demonstrated their ability to withstand margin pressure and have managed to actually increase margins in the face of intensifying competition and escalating input costs through product mix changes and cost control.

Valuations come off the peaks: SSKI top picks have corrected 18-20% in the last month, and are attractive at current valuations. While they maintain Overweight stance on the sector, they have cut price targets of our universe by 6-10% to adjust for the higher borrowing rates and resultant increase in discounting rates.

SSKI reiterate's 'Outperformer' on MUL, Bajaj Auto, Tata Motors and M&M.