| Summary of Contents
| THEMATIC REPORT Speed breaker ahead Key points Sharp moderation in IIP growth to restrict auto growth in FY2013: Our analysis reveals that the automobile sector is likely to experience significant moderation in growth during 2012. We have used the long-term Index of Industrial Production (IIP) multiplier methodology (that relates the level of IIP to the volume growth in the automobile sector) to arrive at sustainable growth rates for different automobile segments. The long-term growth potential looks intact but rapid volume expansion in the last two years has now paved the way for a mid-cycle growth moderation or intermediate down cycle during calendar year 2012.
Risk of downgrade of consensus estimate high; outperformance of auto sector unlikely to sustain
Our optimistic estimate of a single-digit volume growth for FY2013 is lower than the consensus estimate. However, even a single-digit volume growth for FY2013 is challenging as the lag effect of a dismal IIP growth and high inflation sets in. The auto index has outperformed the Sensex in the last six months to one year period. However, the outperformance is at risk as the moderation in volume growth across segments exceeds the street's expectations for FY2013.
| Return comparison | | Particulars | 3-month return (%) | 6-month return (%) | 12-month return (%) | | BSE Sensex | -0.5 | -12.44 | -20.44 | | Auto Index | 0.35 | -2.38 | -16.58 | | Bajaj Auto | 6.58 | 16.51 | 11.45 | | Hero MotoCorp | -2.89 | 2.82 | -0.55 | | Maruti Suzuki | -10.2 | -13.59 | -30.41 | | Mahindra | -9.15 | 4.45 | -7.71 | | Ashok Leyland | -9.04 | -1.25 | -24.03 |
Downgrading earnings estimates for FY2013: We are downgrading our volume and earnings per share (EPS) estimates for all the automobile companies covered by us due to the challenging operating environment. Automobile companies whose earnings estimates have seen significant downgrades include Maruti Suzuki, Ashok Leyland and Mahindra and Mahindra (M&M).
High risk of disappointment in M&M and Bajaj Auto; switch to Maruti and Hero MotoCorp: Considering the volume growth, margin sustenance, capital expenditure (capex) intensity and cash generation of their respective businesses we have assigned a 15% premium to Bajaj Auto and Hero MotoCorp to their respective mid-term average multiples. On the other hand, we have assigned a 15% discount to Maruti Suzuki, M&M and Ashok Leyland based on their mid-term average multiples. In view of the same, we see a much higher risk of disappointment in M&M and Bajaj Auto. Thus, we recommend switching to Maruti Suzuki and Hero MotoCorp.
Switch from M&M to Maruti Suzuki as we believe that the impact of policy action against diesel vehicles/fuel is inevitable and not yet fully factored. For Maruti Suzuki, a 30% stock price correction in the last one year has priced in most of the negatives.
Switch from Bajaj Auto to Hero MotoCorp based on the 14% outperformance of the former. Hero MotoCorp's market share gains in the domestic market over the last few months have not been fully captured in the stock price nor has the loss of domestic market share affected the Bajaj Auto stock fully.
SHAREKHAN SPECIAL Monthly economy review Economy: Industrial growth remains subdued; inflation starts to decline -
In October 2011 the Index of Industrial Production (IIP) growth entered the negative territory showing a decline of 5.1%, which was significantly below the market estimate. The October IIP numbers were the weakest in 31 months and a result of a decline in the manufacturing, mining and capital goods output. For the year-till-date (YTD) FY2012, the IIP growth stands at 3.5% as against 8.7% in YTD FY2011. However, the IIP growth number for September has been revised upwards marginally to 2% from 1.9%. -
The Wholesale Price Index (WPI)-based inflation for November 2011 came in at 9.11%, in line with the Street's expectations. However, the inflation rate for September 2011 has been revised upwards to 10% from the provisional figure of 9.72%. -
The trade deficit for October 2011 came in at $19.6 billion, more than twice the trade deficit level recorded in September 2011. The trade deficit increased by 35.2% year on year (YoY). The growth in exports remained high showing a growth of 21.7% YoY (17.2% in September 2011). The imports grew by 10.8% YoY (up 36.4% in September 2011). Banking: Rate hike takes a breather; CRR cut expected -
The Reserve Bank of India (RBI) has clearly indicated the peaking of rates hikes and articulated the need to support growth. The easing could start sometime in Q4FY2012 by way of a reduction in the cash reserve ratio (CRR) followed by repo rate cuts. -
The credit offtake registered a growth of 17.8% YoY (as on December 2, 2011), which was lower than the growth of 18.4% recorded in the previous month (as on November 4, 2011). The credit growth is largely in line with the RBI's expectation. -
The deposits registered a significant pick-up as these grew by 18% YoY (as on December 2, 2011); the growth was lower than the 17.5% year-on-year (Y-o-Y) growth seen during the previous month (on November 4, 2011). The growth in the deposits was fuelled mainly by term deposits. -
The credit-deposit (CD) ratio was at 74.2% (as on December 2, 2011) as compared to 73.9% as on November 4, 2011. Meanwhile the incremental CD ratio expanded to 73.9% for the period which was lower than the ratio seen during the previous month. -
The yield on government securities (G-Secs; of ten-year maturity) stood at 8.33% as in December 2011 and was lower than the previous month's levels. The G-Sec yields across the long-term maturities declined on a month-on-month (M-o-M) basis. Equity market: FIIs turn buyers -
During the month-till-date (MTD) period in December 2011 (December 1-19), the foreign institutional investors (FIIs) were net buyers of equities and the domestic mutual funds were net sellers of equities. For the MTD period in December 2011 (December 1-19), the FIIs bought equities worth Rs175 crore while the mutual funds sold equities worth Rs307 crore. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | |
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