In metal we trust

Year 2013 outlook: will sector outperformance persist for sixth year? Outperformance will likely be driven by a positive surprise on margins.

Maruti–maintaining Buy (target price R1,600); Tata Motors— maintaining Hold (target price R250); M&M– maintaining Hold (target price R890, 5% increase); Bajaj–maintaining Buy (target price R2,120, 6% increase); Hero–maintaining Sell (target price R1,650); Ashok Leyland –maintaining Hold (target price R23.5); and Hero–maintaining Sell (target price R1,650). We are generally in line or marginally below consensus on EPS (earnings per share) estimates across our coverage.

Margin upside is the key driver to stock outperformance: The BSE Auto Index has outperformed the Sensex for five straight years (CY08-11 & YTD—year-to-date); therefore, the bar is high in 2013, particularly for Tata Motors and Mahindra, which have outperformed across nearly all-time horizons. While the business outlook is positive for demand and margins, we believe the likely volume growth is factored in the current stock prices. Valuations are generally above mid-cycle levels; hence, outperformance will likely be driven by a positive surprise on margins. We see such a possibility at Maruti and Bajaj.

Our top pick is Maruti, followed by Bajaj, Tata Motors, Mahindra, Ashok Leyland and Hero in order of preference.

Margins: will they repeat the goldilocks scenario of CY09? In CY09, auto companies benefitted from a fortuitous combination of rising demand and falling raw material–as a result, the BSE Auto Index outperformed the Sensex by 100% that year. Raw material prices have been relatively stable

... contd.