Monday, September 10, 2012

>AUTOMOBILE SECTOR: Declining trajectory

The change in macro economic variables (Inflation, Interest Rate, GDP, IIP, Household savings) over the past year has altered the dynamics of the automobile industry with the broader segments growing at a slower pace and selective segments showing higher growth. FY09 was a year, which impacted the automobile industry. The Commercial Vehicle Industry was impacted to a far greater extent as compared to the Passenger Car or Two wheeler industry. In order to boost consumption ‘then’, the Government had given stimulus in the form of lower excise duties and wage increases through MGNREGA scheme , which propelled demand.

The current cycle is different from 2009 as it’s associated to sticky inflation, lower household savings, high interest rates and thus slowing growth. This is apparent from lower GDP & IIP numbers, which are a proxy for Commercial Vehicle growth. The current slowdown started with passive passenger car offtake, which then led to lacklustre performance of the CV segment and now is also being reflected among the two – wheeler industry. 2W Industry is taken to be a barometer for rural demand, therefore the plunge in the same reflects signs of lower GDP growth spreading to rural consumption. Tractor sales have also been on a declining trend and deficient rainfall among the highest selling states – Punjab, Andhra Pradesh & Haryana accentuated the same.

In our view the rapid growth of 2010 and 2011 has overstated a portion of future consumption. We would need a series of rate cuts to propel long-term demand, but that also would show the poor state of the economy. As of now, SBI has cut lending rate despite the fact that RBI has not cut repo rate. We can see many such events happening in the future.

CV - Lower availability of cargo from SME’s, lower arrival of fruits and vegetables from Agricultural Produce Market Committee has resulted in truckers reporting 10% - 15% drop in trips on major truck routes in Q1FY13. Simultaneously truck rentals fell by 8% - 11% in Q1FY13 as compared to a 35% jump during October 2009 – March 2012. Rising costs and drooping freight rates have taken a toll on fleet operators profitability. As trucks operate on diesel , a hike in diesel prices would further squeeze their margins. In our view, in order to see rapid expansion of CV’s we would have to see rapid expansion in freight availability, else tonnage growth of the last few years would imply surplus capacity in the system.

2W – Rural spending was higher than urban consumption in the 2 years upto 2012, which led to high 2w growth. But this was devoid of reforms on the fiscal front, which is hitting future rural income growth.

Cars - This segment has been a clear victim of higher fuel prices and higher interest rates as 70% of car population runs on petrol and is financed. Selective pockets have seen growth on account of new launches and price divergence between petrol and diesel prices. In our view, future growth would be a function of rise in per capita income and better fuel economy.

The most sustainable way to solve these problems should come from industry upgrades, company cost rationalization, technological development, innovation and associated government regulations and policies.

To read report in detail: AUTOMOBILE SECTOR

>INDIA STRATEGY:Tracking Promoter Pledging: What’s at Stake?

Quick Comment: As per the SEBI regulations initiated in March 2009, promoters/founders of companies are required to disclose the amount of stock they have pledged.

Key highlights from the latest quarterly disclosures:
Pledges slightly off March 2012 lows: In the quarter ending this June, 767 companies disclosed pledges on their holdings. The pledged value as a percentage of the market cap of these companies is marginally above its March 2012 lows – at 9.8% (up 11bps QoQ). Its share in India’s market cap increased a tad from 2.05% in March 2012 to 2.08% in June 2012.

Value of pledges falls: As at the end of June 2012, the total value of pledged stocks was US$23bn, down 8% QoQ. In rupee terms, the total pledged value stood at Rs1.28trn, up 1% QoQ. Marked to market, as per the previous day’s close, the pledged value of shares was ~ US$22bn, down 9% QoQ without accounting for any subsequent changes that may have happened to the number of shares pledged. In rupee terms marked to market, the pledged value of shares was ~Rs1.27trn, down 0.5% QoQ.

Assuming a 50% margin, the bank credit to these promoters at US$11.5 billion is 2.7% of outstanding bank credit.

During the quarter, Utilities saw the largest fall in share of pledging while Healthcare witnessed a pick-up. At the end of the quarter, Consumer Discretionary followed by Materials have the biggest pledging by promoters in value as well the most widespread promoter pledging. Separately, as a percentage of market cap, pledging is highest for Financials and Energy, while as a percentage of promoter holding, the percentage of pledging is highest for Energy and lowest for Technology.

To read report in detail: INDIA STRATEGY


Getting into the big league; new capacity to prune costs; Buy
We recently met the management of Heidelberg Cement to get latest business updates. Doubling of capacity to 6m tons and the resultant operating leverage (up to `300/ ton in cost savings) would enable Heidelberg to deliver a 65% profit CAGR over CY12-14. We raise CY13 profit estimates by 3% and upgrade the stock to a Buy. Our target of `58 is based on 6x CY13e EV/EBITDA.

 Capacity expansion benefit in 2013. Heidelberg’s ongoing 2.9m ton cement expansion at MP and UP will be commissioned by Nov’12; benefits will come from the 26% volume CAGR over CY12-14. Of the `14bn capex for expansion (US$70/ton) and cost rationalisation (conveyor belt), `13bn has been spent till now. Heidelberg sells most of its output in the Central (high-utilization) and West (high-growth) regions. Management expects double-digit demand growth with a stable price regime in the Central region (65% of sales).

 Significant cost savings. The `2bn capex for conveyor belt (it now utilises trucks to transport limestone) would result in savings of `100/ton on entire capacity. We expect another `200/ton cost savings from lesser power and fuel consumption at the new unit and lower fixed-costs-perton (brownfield expansion with no staff or fixed-overheads increases). We expect EBITDA/ton to rise from `460 in CY12 to `740 in CY13.

 Balance sheet to get better. Current net debt of `7.5bn is likely to have peaked. With no major capex plans for CY13, the company will generate positive FCF. This would generate additional returns through dividend payouts. We estimate return ratios over CY12-14 to jump sharply.

 Change in estimates. Our CY12/13 profit estimates are changed -18% / +3% due to revised assumptions of volume and realisations.

 Valuation. At our target price of `58, the stock is trading at 9.2x PE and EV/ton of US$66 on CY13e. Risks: fall in prices, delay in capacity ramp-up.

To read report in detail: HEIDELBERG CEMENT

>TATA MOTORS: JLR’s US retail volume up 32% y-y in Aug-12

JLR’s retail sales volume in the US increased by 32% y-y in Aug-12.
After four months of weak growth (~7% y-y avg growth), volumes in Aug- 12 were much improved, in our view. We note that Aug-12 had 1 more selling day as compared to Aug-11, and we estimate that this benefitted growth by around 4%. [Note that August retail sales data include 700 units (621 units in July-12) of Evoque. Sales of older models (ex- Evoque) were up by around 12%.]

We are building in flat volumes for models ex-Evoque in the US for JLR in FY13F, compared to around a 6% y-y decline in volumes thus far (FYTD: Apr-Aug).

In Aug-12, based on data from AutoData Corp, Audi sales were up 13% y-y, BMW sales declined 19% y-y and Mercedes sales rose 12% y-y. Total industry US market sales including all vehicle types increased by
20% y-y.

The weighted-average marketing and promotional spend for JLR increased by 4% m-m in August; incentives declined by 2% m-m at Jaguar and increased by 20% m-m at Land Rover.

To read report in detail: TATA MOTORS

>STEEL SECTOR: Prices Under Pressure on China oversupply

We attended Platts’ conference on steel. Key takeaways:
• Iron ore: spot price has corrected sharply in last 2 months to USD 90/t from USD 140/t (62% Fe, CFR China) due to weak steel prices in China and aggressive pricing by Brazilian iron ore producers. However, output cut at Chinese mines (Aug ’12 production is down 10% YoY) would lead to recovery in iron ore
prices from Q4FY13.

• Coking coal: spot price declined to USD 160/t from USD 220/t in Jul ’12 due to strong supply after force majeure ended at BHP’s mines in Australia. However, further downside is limited as spot price is close to cost levels of marginal producers in Australia.

• Steel: prices in Asia corrected due to over-production in China. During March-July ’12, China set a new record of 60 mnt of production each month. Contrary to weak Asian prices, steel prices in US are rebounding on the back of recovery in scrap prices.

Implications for Indian steel producers: Indian steel prices have remained firm (relative to global prices) due to weak INR and lower production from secondary producers. However, average realization will moderate in Q2 due to weak demand and sharp fall in global steel prices. Overall Q2 profitability for Indian steel companies will be lower than that in Q1. We believe production cuts, re-stocking, and potential stimulus in China would lead to recovery in global steel and RM prices Q4FY13 onwards.

Tata Steel remains top BUY
Volume growth on commissioning of 3 mnt project will drive earnings over next two years. Indian operations will also benefit from continuing iron ore shortage in India. Despite weak steel demand in Europe, falling raw material prices would help European operations’ EBITDA to remain positive on yearly basis.

To read report in detail: STEEL SECTOR