>AUTOMOBILE SECTOR: Monthly Numbers update September 2011

September sales brought some cheer for the domestic automobile industry as the 4W players recorded positive growth (incl unlisted players) sequentially with start of festive season and the 2W players continued the robust growth. New launches in the PC segment, increasing discounts and attractive financing scheme supported sales with beginning of the festive season. Tata Motors recorded strong growth as PC sales grew for the first time in the year while M&M continued its strong traction (higher exposure to strong rural market). So while M&M, Tata Motors, Hero Motocorp, Bajaj Auto and TVS Motors clocked growth on y-o-y basis Maruti Suzuki reported a decline of 21% as labor related issues disrupted production.

Bajaj Auto: September sales came in at record 417,686 units representing a growth of 18% on a y-o-y basis and up 9% m-o-m. The company has recorded highest quarterly volumes and we expect company to report strong Q2 results (strong quarter for three wheelers).

TVS Motor: TVS reported total vehicle sales of 219,369 units up 17% y-o-y and up 13% m-o-m as motorcycle growth surprised us positively.

Hero MotoCorp: Hero MotoCorp recorded another month of sales more than 5lacs units with beginning of the festive season, we however expect competition to intensify in H2 FY12.

Mahindra and Mahindra: Mahindra & Mahindra continues to grow across segments, with total vehicle sales up 20% y-o-y to 82,656 units driven by higher tractor and automotive segment (especially LCV segment).

Tata Motors: Total vehicle sales grew 22% to 78,786 units as the strong PC sales supported growth in CV segment. Exports grew 23% y-o-y and 48% m-o-m to 6,220 units.

Maruti Suzuki: Subdued PC sales coupled with disruptions at Manesar plant resulted in total vehicle sales declining 13% y-o-y to 91,442 units. Exports surprised with sales up 18% y-o-y to 14,356 units. YTD FY12, total sales are down 8% to 448,268 units.

We list vehicle sales of other unlisted players to just give an idea of how competition is shaping up in the Indian automobile industry.

We remain positive on 2W industry on the back of rising rural demand, shift in consumer taste towards higher end bikes and expect Bajaj Auto and TVS Motors to be the primary beneficiary (see valuation snapshot in appendix). Tata Motors (not rated) trades at favorable valuations with JLR recording strong volumes and domestic sales pick up ahead of festive seasons. We remain cautious on passenger segment post festive season as macro uncertainties still persist. We do not expect interest rates to come down until end FY12 (though another hike remains a tail event) and expect it to negatively impact PC and M&HCV growth in current fiscal.

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>Capital Goods Q2FY12 Preview

During Q2FY12; CG index underperformed sensex by 11.8%. IIP numbers also did not help as capital goods de grew by 15.2% for July. Obstacles in the form of land acquisitions, environment clearances and rising interest rate still linger on and will continue for near term. We expect flat top line performance for our coverage universe and de growth in EBITDA and PAT due to rising input and interest cost respectively.

Flat growth in top line for Q2FY12

We expect revenue of our coverage universe to witness flat growth as a result of declining or stagnant order book for companies like BGR, Voltas and Crompton Greaves. Crompton Greaves’ overseas business will benefit from Euro appreciation against Rupee by 8% y-o-y. Elecon Engineering and Jyoti Structures shall post decent growth due to growing order book.

EBITDA and PAT to be once again hit by higher material cost and interest charges

EBITDA for coverage universe is likely to decline by 10.3% as a result of mix of increased cost and competition. Therefore, we expect margin for our coverage universe to decline by 120bps. Companies with lower base or escalation clause shall be able to at least maintain their margins. PAT is expected to de grew by 20.6% y-o-y. The de growth is likely to be a result of increased interest cost particularly for BGR Energy and Jyoti Structures.

Another dry spell for order inflow

Announced order inflows for the sector indicate that Q2FY12 could well be another dry spell for orders. Amongst large caps, L&T has just managed an order win of ` 91bln while BHEL did not announce any significant order win except a single BTG package order of 2x660MW from Singareni Collieries for ` 32bln each. Although opening of NTPC super critical bulk tenders (9x800MW) did provide a ray of hope in otherwise a lackluster quarter. Moreover, PGCIL announced orders worth ` 34.5bln (83.3% y-o-y) which may boost order book of T&D companies.

Outlook

We understand poor performance of capital goods sector is built in stock prices to a certain extent; thereby arresting major downside for stocks with good revenue visibility and margin stability. Hence, we like Elecon Engineering and AIA Engineering; Elecon for its strong order book and diversified business and AIA Engineering for its successful headway into international markets in mining and cement that shall reap rich dividends in the long term.

To read the full report: CAPITAL GOODS

>Container Corporation of India

Container Corporation of India (Concor), in which the government of India controls 63% stake, is India’s largest logistics company. It has three distinct characteristics of a carrier, terminal operator, and warehouse operator.

Though the first- and last-mile transportation is by road, rail is the mainstay of the company’s transportation strategy. A majority of the company’s terminals are rail-linked. Concor benefits from a close relationship with the Indian Railways. Several of its terminals are situated on leased

Railway-land. As rail mileage is cost-effective over long distances, the price advantage can be passed on to clients, allowing for flexible and competitive pricing.

Starting operations in November 1989 with seven inland container depots, Concor has since extended the network to a total of 61 terminals. Of these, 18 are export-import depots and 13 exclusive domestic depots. As many as 30 terminals perform the combined role of domestic as well as international terminals.

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>BANKING SECTOR: Preview of Q2FY12 Results

Sector Outlook

The sector has been witnessing a healthy business growth rate till now. Even though interest rates have increased, credit growth has been at a healthy 19.5%, while bank deposits rose 17.38% as on 23rd Sept, 2011.

􀂾 The credit growth has been on account of drawdown from earlier sanctions. With investment in infrastructure slowing down and firms looking abroad for raising money due to lower cost, healthy credit growth in India will see some pressure in the near term.

􀂾 According to data released by the Reserve Bank of India (RBI), bank credit rose 3.9% in the April‐September period, lower than the 5.6% growth in the same period of the previous financial year.

􀂾 RBI has raised key policy rates by 150 basis points since April to rein in inflation and anchor inflationary expectations. In June, majority of the banks increased their lending rates & a few days back, some banks have increased their deposit rates. However, we expect margin to remain stable or slightly down from Q1FY12 levels, given the fact the wholesale deposit rates have come down significantly from June levels.

􀂾 We may see some earning pressure on PSU banks due to system recognition of NPA’s.

􀂾 NPA’s for the sector as a whole may rise from Q1FY12 levels in Q2FY12 results. However, we expect better recovery & upgradations in the sector during the second half of the fiscal and therefore NPA’s to improve in the second half of the fiscal for the sector.

􀂾 Currently, most of thebanks are available at attractive P/BV. We have listed some of them below with our rationale for the same.

To read the full report: BANKING SECTOR