>INDIA AUTOMOBILE SECTOR (UBS)

Prefer passenger vehicle plays

■ Cars & UVs to benefit from easing liquidity environment
We now expect strong growth in passenger vehicles segment at 14%YoY in FY10 and FY11 driven by declining interest rates and easing finance availability. We expect pre-Euro IV emission norm implementation buying and pre-budget buying to further boost demand in Q4FY10.

■ 2 Wheelers likely to show modest growth
We expect 2–wheeler demand to grow 6%YoY and 8% YoY in FY10 and FY11 respectively. Given that we anticipate no easing in financing constraints for the 2W segment, the demand is likely to be driven by growth in rural areas which are less dependent on financing. We expect scooter growth to continue and expect faster growth in scooters ahead of motorcycles.

■ CV to remain sluggish, LCVs faring better
We expect CV demand to rise 5%YoY driven by growth in LCV segment. While we expect turnaround in industrial activity from Jun-09, we expect M&HCV sales to remain weak as industrial growth in FY10 is likely to remain weak. We expect CVs to grow 15%YoY in FY11 driven by rebound in industrial growth.

■ Maintain Buy on Maruti and M&M
We expect Maruti’s margins to improve along with improving demand. We expect Xylo launch & higher rural exposure to help drive UV growth for M&M. We remain Neutral on Hero Honda as we see limited scope for further margin expansion from current levels. We maintain our Sell on Tata Motors as we expect further dilution due to high leverage and remain concerned about cash burn at JLR.


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