Thursday, April 8, 2010


Strong March: Automobile sales witnessed another month of good sales growth aided by economic recovery, an improving bank financing and job outlook, and strong rural demand. Pre-buying support for trucks is evident in March as well, due to change in emission norms. In our view, the truck demand should soften in Q1 FY11 due to prebuying effect. Two-wheeler demand continues to be strong due to improved outlook for winter crop and return of urban demand.

Car demand surprises: Despite pre-buying in February (since excise duty was expected to be raised in March), strong car demand has surprised us. Improvement in outlook for IT services sector, bank financing, and overall job outlook are the key factors that support our bullish outlook for car demand in FY11.

Monthly sales numbers: Ending year with a strong March
■ Strong growth seen in March across segment

■Two-wheeler demand continues to benefit from farm income

and return of urban demand; pre-buying evident in trucks

■ Despite pre-buying in February, strong car demand

surprises; Maruti Suzuki is our preferred play

Maruti Suzuki is our preferred play: Maruti Suzuki has underperformed the Sensex by 12% YTD over concerns of sales’ being affected post excise duty rollback, as well as increasing competition. In our view, both concerns are overdone as demand continues to be strong despite the increase in excise duty in March by 2%. Market share loss is likely to be limited to the bigger towns. Wide reach within the country should help the company tap the rural demand and grow volumes. Also, we should keep in mind that the industry pie is getting bigger. Q1 sales and earnings are likely to be the key stock catalysts. We maintain our target price of INR1,880. Currently, the stock is trading at 13x FY11e EPS of INR106. We expect post Q1 earnings surprises; the multiple should expand to 15.4x (last five-year average). Our target price implies 15.4x our FY12e EPS of INR122. Key risks include higher-than-expected input costs and competition.

To read the full report: INDIAN AUTOMOBILES