Auto sector: Ready to roll

Robust volumes in July point to a recovery in the auto sector.

Easier credit availability and softening interest rates helped auto makers continue their trend of positive growth in the current fiscal. Vehicles sales started showing positive growth in February this year and have been hovering at around 8 per cent plus growth rates in the current fiscal. Auto companies which had been struggling with depressed demand in the second half of 2008-09, reported double-digit growth rates for July, 2009 with leaders-Maruti Suzuki and Hero Honda-experiencing a 30 per cent y-o-y growth. We highlight the performance of the key listed players in the major auto segments.

Two-wheelers
The two-wheeler segment has been the least impacted among all the auto categories registering a 15 per cent y-o-y growth in July and an 11 per cent growth in year-to-date sales. While Hero Honda continues its strong run due to a robust showing from the rural segment which contributes to about half of its sales, Bajaj Auto’s declining sales seems to have bottomed out. TVS Motors also saw higher growth rates on sequential, yearly and year-to-date numbers.

The battle in the motorcycle space which is the largest in two wheeler category is likely to shift to the executive segment (100 cc+ upto 125 cc) with Bajaj launching 100cc Discover DTS-Si bike in July. While Hero Honda’s dominance is unlikely to be challenged in the rural sector anytime soon, Discover is aimed at grabbing customers away from Hero Honda’s top-selling executive segment models – Splendour and Passion. Both companies are also looking at tapping the low-cost bike market with prices expected to hover at about Rs 20,000. Going ahead, expect Hero Honda and TVS to post double digit growth and Bajaj Auto to improve its position from flat sales growth. The key concern, especially for Hero Honda, will be a deficient monsoon which is likely to drag down sales from the rural segment.

Cars, UVs and tractors
Passenger car sales which had jumped 18 per cent in June are expected to post 20 per cent y-o-y growth rates for July. Small-car king Maruti Suzuki and utility vehicle leader Mahindra & Mahindra (M&M) have reported strong volumes. Maruti Suzuki recorded a 27 per cent increase in the domestic market aided by strong sales from the A2 (A-Star, Swift, Ritz) and A3 segments. Combined with exports of A-Star, total sales volume jumped 33 per cent y-o-y. For M&M, a good showing of recently launched Xylo helped it record a sharp 56 per cent y-o-y jump in utility vehicle sales. The company’s tractor sales also recorded an impressive 72 per cent y-o-y growth due to a low base and strong demand. Tata Motors managed a 21 per cent y-o-y growth in the passenger car segment thanks to the 2,500 units sold on account of Nano and 2,690 units from its Fiat JV. Going ahead, while Maruti will be looking at exports to boost its sales, Tata Motors will be eyeing the 1.55 lakh bookings for the Nano to ramp up its numbers.

Commercial vehicles
The CV segment, which has been the worst-hit among the auto segments due to the economic slowdown and lack of credit availability, has been on a downward trajectory since August 2008. But, going by the numbers over the last four months it looks like the sector has seen off the dip experienced in December where total CV sales stood at 20,000. July numbers are expected to be double this figure. Tata Motors, the largest commercial vehicle manufacturer in the country, saw a 6 per cent growth y-o-y in M&HCV sales to about 10,000 units. This is the first time in over a year that the manufacturer has seen a positive growth. The LCV show for this company was even more impressive as it registered a 44.5 per cent growth due to a strong demand for goods carrier Ace and passenger vehicles, Winger and Magic. The other major player Ashok Leyland, continues to face problems with July sales down 34 per cent over the previous period. Since October 2008, the company has been registering a 50 per cent fall in sales volumes till June 2009. While a major turnaround for both these players will depend on the pickup in economic activity, higher bus sales due to JNNURM projects should boost sales going ahead.

Conclusion
With private sector banks coming back to the auto loan segment and demand picking up the future looks good for the auto sector. Further cost cutting measures, excise breaks and a dip in commodity prices have helped companies improve their margins. All companies reported a smart rise in margins, barring Ashok Leyland which saw its margins fall to just 1.2 per cent in June quarter. Overall, strong volume growth (except M&HCV) across categories and improvement in margins enabled the sector to report a 23-24 per cent y-o-y rise in adjusted net profits for the quarter. Going ahead, analysts expect nearly all companies to report positive growth in revenues, operating profits and net profits for 2009-10, except for Tata Motors, which is expected to report a lower (though lower y-o-y) due to Jaguar and Land Rover operations.

Companies have not completely passed on the excise duty benefits and are likely to use the surplus to aggressively promote new launches. Though there are signs of a turnaround as the sector has been exhibiting consistent numbers, stocks of auto majors (see chart price performance) despite the recent correction, are up significantly. The biggest gainers over the last one month have been Tata Motors (48 per cent) and Maruti Suzuki (20 per cent). Analysts believe that the stocks are trading at close to their 52-week highs and future prospects on account of higher sales are already priced in.