Thursday, August 23, 2012

>Q1FY2013 Auto earnings review

Drive with caution
  • Auto sector reported flat growth for Q1FY2013; has given lacklustre returns in last six months: In our Thematic Report dated December 27, 2011, we had expressed concerns over the moderation in growth of the automobile (auto) sector with the full impact of the moderation expected in H1FY2013. As against the benchmark index' return of 13% between December 27, 2011 and August 21, 2012, the auto stocks under our coverage too gave an average return of 13%. The best return of 57% came from Apollo Tyres, our top pick for the last six months. The next highest return came from Maruti Suzuki at 22% due to the stock sell-off on account of the Manesar strike. Excluding these two stocks, the rest of the universe gave a negative return of 0.5% between December 27, 2011 and August 21, 2012.

    As we analyse the Q1FY2013 results, our coverage universe saw a profit after tax (PAT) growth of merely 2%. Our auto tracking universe of 15 companies, ex Tata Motors, saw a PAT growth of 2.5% year on year (YoY); that with Tata Motors saw a PAT growth of 11% YoY during the same period. 

  • M&M added to our conviction list on robust Q1FY2013 performance: During the past six months, most of the stocks under our coverage except Apollo Tyres had been kept on Hold recommendation. We recently added Mahindra and Mahindra (M&M) to our Buy list as we see it as a proxy play on food inflation and best positioned to benefit from the reviving rural incomes (refer to our Stock Update report on M&M dated August 21, 2012). 

  • Apollo Tyres, M&M and Tata Motors top revenue earners; Maruti, SKF laggards: Apollo Tyres saw its Q1FY2013 PAT growing the most, by 79% YoY, on a strong operating performance. Tata Motors, M&M and Suprajit Engineering also reported a 20% plus Y-o-Y earnings growth. The disappointment came from Maruti Suzuki and SKF India, both of which reported an earnings decline of over 20% YoY for the quarter. 
  • Outlook and valuation: Going forward in H2FY2013 and FY2014, barring a few companies like Maruti Suzuki, which would grow on a low base, a large part of the earnings growth is expected on an improved operating performance in H2FY2013 and FY2014. The volume growth may remain modest, but the raw material pressure is expected to moderate for most companies in H2FY2013. After keeping most auto companies on Hold for the last six months, we have added M&M to our Buy list along with Apollo Tyres. The outlook on most other companies looks cautious as multiple factors related to competition, inventory build-up, global slowdown and fuel price hike continue to weigh on the auto sector.