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| Summary of Contents SECTOR UPDATE Automobiles Automobile March 2014 sales: strong growth in two-wheelers; sluggish CV sales Automobile companies continued their weak performance in the March 2014 volumes. Two-wheeler companies such as Hero MotoCorp and TVS Motor Company (TVS Motor) reported a strong volume growth, while Bajaj Auto volumes were flat. Maruti Suzuki India Ltd (MSIL) and Mahindra and Mahindra (M&M) reported a single-digit decline in the passenger vehicle volumes. The commercial vehicle (CV) volumes continued to remain sluggish for Tata Motors, Ashok Leyland and M&M. Tractor makers, M&M and Escorts, witnessed a fall in growth rates. The key takeaways are - The overall automobile sales continued to remain weak in FY2014 because of the higher interest rates, increase in fuel costs and uncertain economic conditions. Tata Motors (domestic operations) and Ashok Leyland continued to struggle given the sharp fall in the CV sales. The medium and heavy commercial vehicle (MHCV) segment reported a significant decline in the volumes during the year FY2014.
- Despite a recent excise duty cut, MSIL and M&M reported a mid single-digit decline in the passenger vehicle volumes, largely due to poor consumer sentiment. However, new launches continued to do well across the industry including MSIL's Celerio.
- In the two-wheeler space, Hero MotoCorp and TVS Motor reported a strong double-digit volume growth owing to a strong presence in the fast growing scooter space and new product launches in the motorcycle segment. Bajaj Auto on the other hand reported a marginal overall volume growth even as its exports grew in double digits.
- In the tractor segment, the March 2014 volumes for Escorts were flat year on year (YoY) while M&M reported a mid single-digit growth in the domestic volumes. For FY2014, the tractor industry has witnessed a 20% growth largely on good monsoons and the rising agricultural income.
- We remain cautiously optimistic on the automobile sales as we believe the improving macro economic outlook, a low base effect and the recent excise duty cut will act as a key catalyst in the upcoming months. The excise duty cut has failed to ignite the demand in March 2014 as the sentiment continues to remain weak. However, going forward as the economic conditions improve, the passenger vehicle segment could witness a renewed demand. In the two-wheelers space the scooter segment continues to outperform. Additionally, new product launches and an increasing penetration in the rural market will drive volumes. The CV industry has reported about 25% decline for two successive years. The segment is expected to remain under pressure for a few more months and a revival is expected as economic activity picks up post-general elections.
Picks: We continue to prefer MSIL and M&M among the stocks under our active coverage. Amongst the stocks under our soft coverage, we prefer Hero MotoCorp.
SHAREKHAN SPECIAL Q4FY2014 Capital Goods & Engineering earnings preview Key points - Aggregate performance is not materially different: The aggregate performance of capital goods companies under our coverage is not likely to be materially different than the past quarters. The margins remain under pressure with the PAT on the decline.
- But smaller product companies to show marked improvement in performance: The aggregate earnings growth is expected to be dented by a weaker performance from larger players like Bharat Heavy Electricals Ltd (BHEL) and Thermax. In case of Larsen & Toubro (L&T), Q4 numbers are not comparable YoY due to the hiving off of hydrocarbon business in Q3FY2014. On the other hand, Crompton Greaves (recovering post-restructuring), Bajaj Electricals (the loss in the engineering and projects (E&P) segment to come down) and V-Guard Industries (low Q4FY2013 base due to one-off items) are expected to surge in earnings on the back of a marked improvement in their margins.
- Better order inflows: The book-to-bill ratios of our coverage companies remain at 2.4x but there are early signs of an improvement. L&T continues to show a healthy order inflow, while BHEL surprised us positively as it bagged more orders in Q4FY2014 after a few lull quarters.
- Re-rating on expectations of economic revival and better policy environment ahead: The expectations of a revival in the economy, boost in the investment cycle owing to a favourable election outcome and improvement in the policy environment are cumulatively going to re-rate the cyclical sectors, especially the beaten down capital goods stocks. This is in line with the portfolio strategy given in the market outlook report (Resilience amid uncertainty) released in early March 2014. Within our Sharekhan coverage universe, we prefer L&T, Crompton Greaves, Bajaj Electricals and Kalpataru Power Transmission Ltd (KPTL).
| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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