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| Summary of Contents | SECTOR UPDATE Q2FY2015 Auto earnings review
Auto sector is among the early gainers of economic revival and would continue to outperform benchmark indices over the next 12-18 months long Key points - The automobile sector received a volume push in Q2FY2015 on the back of an improvement in consumer sentiment and an early festive season. The two-wheeler segment was the front-runner with an impressive 20% growth while the PV segment grew by 7.3% largely driven by the market leader Maruti Suzuki India (Maruti). An improvement in freight rates and a low base effect resulted in a growth in the heavy truck segment while the LCV segment continued its declining trend.
- Our auto universe (ex Tata Motors) reported a healthy 14.9% growth in revenues and a 21.1% growth in the PAT. The stand-out performances were by Ashok Leyland Ltd (ALL), Eicher Motors and TVS Motor Company (TVS; though it was expected and did not come as a surprise). After seven quarters of losses, ALL was back in the black driven by a 9% volume growth and OPM expansion of 500BPS. Eicher Motors reported a 54% PAT growth on the back of a continued strong performance by Royal Enfield. TVS too reported a 43.4% growth in the PAT driven by a strong growth in volumes. In the ancillary space, Gabriel India and Bharat Forge reported a strong 50% plus PAT growth.
- Driven by positive consumer sentiment, we expect the two-wheeler industry to continue to grow albeit at a slower pace (lower than the 20% growth in Q2FY2015) in the medium term. The PV industry's growth has been propped by the elevated discounts offered and a firm trend is not yet in place. However, Maruti is expected to outperform the industry, given its strong product folio and brand equity. The CV segment should continue to grow on a low base driven by the increase in economic activity.
- Preferred picks: In the two-wheeler space our preferred pick is Hero MotoCorp (market leader, export opportunities and expected margin expansion). In the PV space we are positive on Maruti (the leader in the PV market and a strong product pipeline) and M&M (the leader in the UV and tractor segments, contribution of subsidiaries). The revival in the CV cycle is in its early stages and we expect a sustained growth over the next three years largely factoring in a strong pick-up in the economy. Our preferred pick in the CV segment is ALL, which is a pure play on the domestic revival unlike Tata Motors. In the ancillary space, we are positive on Apollo Tyres, Gabriel India and Rico Auto Industries.
| | 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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