Any meaningful growth recovery would happen only in FY15
We are cautious on the Indian auto sector growth in FY14e post our interactions with companies? managements and channel checks with dealers and finan-ciers. While we expect demand headwinds to recede, any meaningful growth recovery would happen only in FY15e. After a 10-20% fall in the last three months, we believe auto stocks are pricing in a slow recovery in demand.
We think the current weakness provides an opportunity to buy stocks with strong fundamentals. Tata Motors is our top pick given our positive view on the JLR business. We rate Maruti Suzuki (MSIL), Mahindra & Mahindra (M&M), Ashok Leyland (ALL) and Eicher Motors (EIM) Outperform and maintain Underperform ratings on Bajaj Auto and Hero MotoCorp (HMCL).
The year ahead: Macquarie India Economist believes India?s GDP growth bottomed at 4.5% in Q3FY13 and expects growth to improve to 6.2% in FY14e (estimates). The expected pick-up in the investment cycle will help revive M&HCV (medium and heavy commercial vehicles) demand but only with a lag. Our channel checks indicate no signs of an improving consumer sentiment as yet. We don?t expect rate cuts to immediately spur car demand as auto loan rates are already low. Further, the diesel price hike will impact demand for diesel cars and SUVs, which have been the bright spots in FY13. We expect M&HCV sales to grow 2% (-23% in FY13e), LCV (light commercial vehicles) sales to grow 14% (14%), passenger vehicles 6% (2%) and 2-wheeler 6% (3%).
Two-wheelers (2W), concerns are more structural than cyclical: Our analysis of the 2W ownership data indicates that in the target segment, every fifth person already owns a 2W and the penetration of motorcycles amongst men is much higher (32%). We expect 2W sales growth to slow to a 4.3% CAGR in the next 10 years from 12% in the last 10. In this scenario, Honda?s ambitious sales targets can be achieved only at the cost of incumbents (Hero and Bajaj).
Jaguar Land Rover? momentum continues in FY14e: Growth in the JLR business will be driven by new model introductions?new Range Rover, new Range Rover Sport, F-Type, XF Sportbrake and other variants. The Jaguar brand, which was under-invested in the past, will see growth improving in FY14e led by recent model changes. JLR is expanding sales reach aggressively, e.g. number of dealerships in China will expand by 25% this year.
What if it gets worse before it gets better? Our auto sales estimate for FY14e is based on the assumption of an improving economic growth and revival in the investment cycle in India. We believe there is a risk to this assumption given political and economic uncertainties. The risk to our margin estimates is from deterioration in the competitive intensity leading to higher discounts or marketing spend. Our analysis of possible scenarios for the companies indicates 10 to 20% downside to EPS estimates.
No, it isn?t ?all in the price?: We believe there is downside to the street?s FY14e volume growth expectations. Our FY14e EPS estimates are 5-15% lower than consensus. Tata Motors is our top pick as we expect JLR to maintain volume growth & margins in FY14e.
Macquarie