>AUTOMOBILE SECTOR (BRICS)

BRICS auto universe registered 69% yoy growth and 4% mom decline in vehicle sales in December 2009- commercial vehicles (up 146% yoy, 21% mom), two wheelers (up 69% yoy, down 4% mom) and passenger cars (up 58% yoy but down 6% mom). Key highlights: (1) CV sales of Tata Motors and Ashok Leyland improved 143% yoy and 165% yoy respectively, (2) Maruti’s exports rose 21% mom, (3) TVS’ motorcycle sales grew 24% yoy (first positive growth in FY10), and (4) M&M’s automotive sales grew 125 % yoy mainly on low base effect along with better performance of Scorpio and UVs.

BRICS auto universe registered 69% yoy growth and 4% mom decline in vehicle sales in December 2009. Two wheelers saw 69% yoy growth led by Bajaj Auto. While commercial vehicles grew 146% yoy led by Tata Motors (143% yoy growth), passenger car companies grew 58% yoy (6% mom decline).

Two Wheelers: The industry continued to report impressive performance and reported 69% yoy growth despite the end of festive season in October (usually November-December is lean period as most purchases are made during festive season). Bajaj Auto’s total sales was down 9% mom mainly due to lower sales in motorcycles (Pulsar sales volume at 44,518 units was lower than average 50,000 units and Discover 89,769 units v/s average 92,000 units). TVS Motor reported 24% yoy growth in motorcycle, 44% in scooters and 41% in mopeds. Industry leader Hero Honda maintained momentum and reported 74% yoy growth. We expect growth traction in two-wheelers to continue for rest of FY10.

Passenger Cars: Sales volume for Maruti Suzuki was up 51% yoy and down 3% mom, while for M&M it was up 120% yoy and 12% mom. Domestic volume for Maruti was up 37% yoy at 71,000 units, while exports were up 223% yoy and 21% mom at 13,804 units. The company said it would achieve export target of 140,000 units in FY10 (YTD 105,535 units). Tata Motors posted growth of 48% yoy in volumes but down 30% mom at 15,239 units.

Commercial Vehicles: Commercial vehicle sales volume reported 146% yoy and 14% mom growth. Ashok Leyland (165% yoy growth) outpaced Tata Motors (143% yoy growth). We expect CV sales growth to remain robust in Q4FY10, led by improving industrial production.

M&M and Bajaj Auto preferred bets
We expect auto sales to continue to grow over FY09-11 driven by rising income, easy access to financing, and higher industrial production. We prefer exposure in M&M and Bajaj Auto in the auto space as they are likely to be biggest beneficiaries of growth in India's consumption. M&M is our preferred bet - we value M&M's core business at Rs910/share and subsidiaries and other investments at Rs443/share (after applying 20% holding company discount) and expect RoCE of 20% in FY10 and 19% in FY11. We have a BUY on Bajaj Auto - expect 22% CAGR in sales volume (likely to regain some domestic market share lost in FY08 and FY09), 12% revenue CAGR and 64% earnings CAGR over FY09-11, and RoCE at 35% in FY11 v/s 31% in FY09. The stock trades at 17x FY10E and 15x FY11E, which is attractive. We expect Bajaj Auto to trade at premium to Hero Honda (15x FY11E) as it is expected to deliver higher earnings growth.

To read the full report: AUTOMOBILE SECTOR