Published on 2/01/2018 5:00:56 PM | Source: LKP Securities Ltd

Auto sector Update For December 2017 - LKP Sec

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Strong set of numbers

December is seasonally a weak month for auto sales wherein customers postpone their buying in order to get a new year of registration for their vehicles. Also some companies undertake maintenance shutdown in this month which impacts production, thus sales. However, December 2017 has been an exceptional month wherein most of the auto companies have bucked the trend and reported robust set of numbers.

This has been on the back of weak base post DeMon last year and overall pick up in the auto sector with economic revival. Bajaj and TVS both reported splendid exports numbers as we learned that Nigeria, one of the biggest exports markets for Indian two wheeler makers is back on track of revival. New geographies like Iran and Turkey have also provided the necessary impetus for Bajaj Auto. On the 3W business segment, new permits opening in Maharashtra and other states like Delhi and Karnataka have led to a surge in domestic 3W sales.

Even in the exports markets revival in African markets is leading to good 3W numbers. On the PV side, MSIL still reported within its run rate of 10-15% growth based on strong order book for the new Dzire, Vitarra Brezza and Baleno. M&M, on the other hand has reported weak set of numbers in the UV business as there has been no new launch off late to tackle competition. FES segment outperformed this month with a 30%+ growth.

ALL and TaMo both reported solid MHCV growth on low base. Even sequentially they reported good growth which signals intrinsic growth within the sector on infrastructural development and core sector reporting good set of numbers. Among the 2W pack, we like Hero (55% of rural volumes) which is a proxy to the rural story and is expected to pan out well on good monsoons, new launches, 7th Pay Commission and slurry of new launches as announced by the management though the valuations are a bit stretched.

Bajaj Auto stock looks better on valuations but has been witnessing pressure in the domestic 2W markets on competition. However, since Q1, we are seeing the exports pressure reducing as the company enters newer markets, due to which we are optimistic on it too. TVS has been posting excellent sales performance but the double digit operating margins still look illusive, which is our major concern.

We like MSIL on its sheer market leadership strength, new launches in the UV and the premium car segment, its image of a car made for India, solid distribution network and lesser impacted due to DeMon and BS III ban. With its recent new launches like Baleno, Vitarra Brezza, Super Carry LCV and Ignis hatchback, we remain sanguine on MSIL. However, on valuation front it looks quite expensive to buy at these levels.

We like Ashok Leyland as it’s a prime beneficiary of the CV cycle up move, which has already started to look up on expected good monsoons and infra cycle pick up. FES segment and strong subsidiary valuation will assist M&M to grow well from these levels, though UVs will disappoint on and off till new launches arrive..

Viewing the recovery in JLR numbers and strong domestic sales, we like Tata Motors. The most interesting driver for the industry will be the upcoming launches of the Electric Vehicles and the race for gaining market share in that segment. It can be anybody’s game in the coming years.

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