M&M skirts downgrades, but jury’s out on Maruti

With slowdown eroding demand, the outlook on the auto sector for this year is quite weak, if not bleak altogether.

Indeed, analysts expect the earnings before interest, tax, depreciation and amortisation, or Ebitda, margins to decline 30-60 basis points (bps) across the sector due to increased competition and slide in the rupee’s value, among other factors.
However, Mahindra & Mahindra is seen bucking the trend, thanks to its product launches, greater dependence on the rural market and strong diesel portfolio.

“Management is confident of continuing growth in the UV segment despite increasing competition. As per the management, M&M has products across rural (Bolero), semi-urban (Scorpio) and urban (Xylo and XUV500) segments; thus is well placed to face competition,” analysts Binay Singh and Shreya Gaunekar of Morgan Stanley wrote in a note.

Deepak Jain, analyst with Sharekhan, drew attention to the company’s diesel portfolio. “M&M is strongly placed in the diesel segment. However, the company’s growth will be more policy driven. The government is expected to announce diesel tax, which might affect the consumer sentiment. Hence one should wait and watch,” he said in a note.

Tractor growth, which was moderating in the last two months, is expected to pick up in coming quarters. This is seen working in M&M’s favour.

“We forecast FY12/13E/14E tractor growth at 18%/10%/7%. We expect tractor margins to fall by 100bps over next two years. The key growth driver for tractors over the last two years has been state-sponsored employment guarantee schemes, which led to a labour shortage in agricultural surplus states,” wrote Srinivas Rao and Amyn Pirani of Deutsche Bank.

On passenger car market leader Maruti Suzuki India, however, analysts are less gung-ho, though no one’s downgrading the stock just yet. The company is expected to see challenging times in the medium term due to weak demand for entry level cars and multi-purpose vehicles, which contribute almost 55% of its total volume. Further, Maruti is disadvantaged due to capacity constraints in production of diesel vehicles.

“For Maruti Suzuki we are estimating a volume growth of 16/13% for FY13/14. Deutsche Bank estimates the yen to appreciate by 3-4% in 2012, which would offset any gains from higher volume growth and a better sales mix in FY13E,” Rao and Pirani of Deutsche Bank wrote.

For Tata Motors, the concern is over growing competition in the heavy and light commercial vehicles (LCV) space. Among others, Daimler will soon launch its ‘Bharat Benz’ branded trucks this year and plans to bring in 13 products by 2013, while Mahindra Navistar has already started gaining traction in the market. The LCV space, which Tata Motors ruled with its Ace, is now getting crowded with companies like M&M and Ashok Leyland-Nissan introducing new products.

On the other hand, analysts are cautious about the growth in the two wheeler industry, which witnessed healthy demand in 2011. “We believe that investors should take profit in this segment as supply side dynamics are likely to be more challenging going ahead, given aggressive launches by the Japanese OEMs,” analysts Aditya Makharia and Ritesh Gupta of JP Morgan wrote in a note.