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November 19, 2014
Index
Sector Update >> Q2FY2015 Auto earnings review
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investor’s eye
sector update
Sector Update
Q2FY2015 Auto earnings review
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.
Q2FY2015 results snapshot
Companies
Coverage
Maruti Suzuki
Bajaj Auto
TVS Motor
Mahindra & Mahindra
Ashok Leyland
Apollo Tyres
Greaves Cotton
Gabriel India
Rico Auto Industries
Sharekhan Universe
Non-coverage
Tata Motors
Hero MotoCorp
Eicher Motors#
Exide
Bharat Forge
Suprajit Engineering
Fiem Industries
Ceat
Balkrishna Industries
JK Tyre & Industries
Total
Auto universe (ex TAMO)
Rs cr
Net sales
Q2FY2015
OPM (%)
Adj. PAT*
YoY %
Q2FY2015
YoY BPS
Q2FY2015
YoY %
12,303.8
5,963.1
2,683.1
9,177.9
3,217.7
3,315.2
470.5
384.5
388.1
37,903.7
17.5
15.2
34.9
5.6
26.2
-3.4
5.0
21.2
4.0
13.3
12.4
20.0
6.1
12.0
7.3
14.9
11.4
8.0
9.1
12.7
-26.3
-260.8
17.5
-155.6
507.7
172.2
14.5
169.5
9.9
-42.3
862.5
876.3
94.8
974.1
39.0
257.9
33.7
19.0
2.9
3,160.1
28.7
1.3
43.4
1.7
NA
3.4
5.0
64.9
NA
13.8
60,564.2
6,915.3
2,275.0
1,763.3
1,138.3
152.9
210.5
1,437.8
881.3
1,872.4
115,114.6
54,550.4
6.5
20.8
31.0
23.1
34.7
24.2
17.5
7.7
5.0
3.6
10.3
14.9
15.8
13.5
13.4
11.8
28.5
16.3
12.3
12.2
23.5
12.4
14.6
13.3
61.5
-102.4
132.6
-228.1
216.7
-75.4
46.9
-123.3
-55.9
78.7
13.6
-37.7
3,291.0
763.4
165.0
125.8
178.6
14.4
10.6
82.1
90.2
76.5
7,957.5
4,666.5
-12.1
58.6
53.6
6.0
85.3
11.6
17.4
7.2
-16.5
15.6
4.7
21.1
# Q3CY2014 results, * excluding exceptional items
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investor’s eye
sector update
Valuations
Company
CMP
Coverage
Maruti Suzuki
Bajaj Auto
TVS Motors
M&M *
Ashok Leyland
Apollo Tyres
Greaves Cotton
Gabriel India
Rico Auto Industries
Non-coverage
Tata Motors
Hero MotoCorp
Eicher Motors#
Exide
Bharat Forge
Suprajit Eng
Fiem Industries
Ceat
Balkrishna Industries
JK Tyre & Industries
EPS (Rs)
P/E(x)
Old
New
Price
(Rs)
FY14
FY15E
FY16E
FY14
FY15E
FY16E
reco
reco
target (Rs)
3,340
2,670
237
1,247
53
225
146
93
44
92.1
113.9
5.5
62.2
-1.8
20.7
4.9
3.3
0.2
116.9
120.9
8
63.7
0.5
22.8
6.4
5.2
2.1
155.3
144
10.6
73.3
2.7
25
8.6
7.2
4
36.2
23.4
43.2
20
-29.5
10.9
29.9
28.5
220.7
28.6
22.1
29.7
19.6
104.5
9.9
22.7
18
21.1
21.5
18.5
22.4
17
19.6
9
16.9
13
11.1
Buy
Hold
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Hold
Hold
Buy
Buy
Buy
Buy
Buy
Buy
3,600
2,338
250
1,440
58
265
155
110
55
528
3,002
14,738
159
918
125
721
914
634
515
43.5
105.6
145.7
5.7
21.4
4.5
31.2
78.2
50.5
69.5
57.7
143.1
232.3
6.7
27.2
6.1
41.2
75.7
50.9
76.5
66.4
179.4
371.8
8.1
36
7.8
54.3
92.1
56.9
86.8
12.1
28.4
101.2
27.7
42.9
27.6
23.1
11.7
12.6
7.4
9.2
21
63.4
23.6
33.8
20.4
17.5
12.1
12.5
6.7
8
16.7
39.6
19.6
25.5
15.9
13.3
9.9
11.1
5.9
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
Not
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
rated
*M&M + MVML
EPS CAGR: FY2014-16 and CY2013-15
An early festive season boosts volume in Q2FY2015; CV
growth in positive territory
70%
Eicher
50%
40%
10%
0%
FIEM
HMCL
TVS
30%
20%
With the festive season this year a month early, the auto
industry received a volume boost in September as
manufacturers stocked up inventories ahead of the all
important season. This was an additional boost to volumes
in Q2FY2015. The two-wheeler industry had another
excellent quarter with an impressive volume growth of
20%. Riding on the back of a slew of new launches, TVS
outperformed with a growth of 34.2%. Hero MotoCorp Ltd
(HMCL) too witnessed a strong 19.5% growth while Bajaj
Auto continued to underperform with a growth of 9.8%.
Maruti was able to maintain the growth momentum and
reported a growth of 16.8%, significantly ahead of the
domestic industry growth of 7.3%. In the commercial
vehicle (CV) space the heavy truck segment reported a
positive growth aided by an improvement in freight rates
and the benefit of a low base. ALL reported a growth of
9.8%; however, for the CV market leader Tata Motors the
volumes were down 15.7% year on year (YoY) as the light
commercial vehicle (LCV) and passenger vehicle (PV)
segments remained a drag.
Gabriel
60%
Suprajit
BFL
GCL
MSIL
Tamo
Exide
BAL
JKI
Ceat
M&M APTY
BKT
P/E based on FY2016 and CY2015 estimates
45
40
Eicher
35
30
25
20
15
10
5
0
BFL
MSIL TVS
ALL
BAL
M&M
GCL
Exide
HMCL
Gabriel
Rico
APTY
Tamo
Suprajit
FIEM
BKT
Ceat
JKI
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investor’s eye
sector update
Q2FY2015 Y-o-Y volume growth %
for the sector on a sequential basis. Tyre manufacturers
(except Balkrishna Industries [BKT]) were the stand-out
performers as the sharp fall in natural rubber prices and
stable/mildly negative realisations led to an expansion in
the gross profit margin (GPM). BKT, with predominant sales
in Europe and the USA, witnessed a contraction in margins
as the company passed on the benefit of lower rubber
prices to consumers in light of a competitive market
scenario. Bharat Forge’s contribution margin normalised
as the margin had been inflated in the previous quarter
due to an inventory build-up.
Eicher (CVs)
Eicher (Motorcycle)
HMCL
Tamo (JLR)
Tamo (Domestic)
ALL
M&M (Tractor)
M&M (Auto)
TVS
BAL
MSIL
-20
0
20
40
60
80
Mixed trend in OPM
Two-wheeler original equipment manufacturers (OEMs)
Bajaj Auto and HMCL reported a year-on-year (Y-o-Y)
contraction in their margin. While Bajaj Auto had the
benefit of a sharp depreciation of the local currency
against the dollar in Q2FY2014, HMCL saw increased
marketing and brand promotional expenses which dragged
the margins lower. Maruti and M&M too witnessed pressure
on their margin due to increased discounts and offers to
customers and absence of any price increase. ALL, Gabriel
India, Bharat Forge and Eicher Motors witnesses a sharp
increase in their operating profit margin (OPM).
Auto universe (ex TAMO) reports a 14.% revenue growth
The growth in volumes translated into a healthy 14.6%
growth in revenues for Sharekhan’s auto universe (ex Tata
Motors [TAMO]). TAMO reported a modest revenue growth
of 6.5% as the Jaguar Land Rover (JLR) volumes grew by a
mere 2% largely due to a high base and the domestic
revenues fell marginally due to a fall in the volumes. For
two-wheeler manufacturers the realisations were
relatively flat YoY and the growth in the revenues was in
line with that in the volumes. TVS led the pack with a
revenue growth of 35% YoY. Mahindra & Mahindra (M&M)
underwhelmed with a 5.6% growth in the top line largely
due to a fall in the volumes in the automobile business
and a meek 3.2% growth in the tractor business. Tyre
manufactures reported a mid single-digit growth in the
domestic revenues with the exception of Apollo Tyres
(APTY). APTY’s revenues were down 3.4% YoY as the
company sold part of its overseas operations in Q3FY2014.
Further drop in natural rubber prices
On the commodity prices front, tracking the weakness in
international natural rubber prices, the domestic natural
rubber prices continued their fall during the quarter to
touch a multi-year low. With the supply continuing to
outstrip the demand, rubber prices are expected to remain
under pressure. Aluminum prices continued to harden on
the London Metal Exchange while lead and steel prices
remained sideways.
Revenue growth in Q2FY2015
40%
35%
30%
TVS
BFL
HMCL
Eicher
25%
ALL
20%
15%
10%
Gabriel
`
Rico
MSIL
BAL
5%
0%
-5%
-10%
M&M
GCL
Sequential growth in commodity prices
15%
ExideSuprajit
Tamo
FIEM
10%
Ceat
BKTJKI
Aluminum
5%
Lead
0%
APTY
Steel
-5%
GPM expansion for tyre manufacturers
With commodity costs relatively stable during the quarter,
there was no significant change in the contribution margins
-10%
Rubber
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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