Automobile Sector Stocks - Results Analysis

In an interview with Ambareesh Baliga of Karvy Stock Broking gave his perspective on the results from the auto sector and the road ahead for the space. He feels stocks like Hero Honda may correct by 10-15% from CMP. Checkout..

Two-wheeler major Hero Honda came in with strong third quarter numbers. Profits surged 78% to Rs 535 crores, while margins came in at a robust 17.27%. The company says the good results are on account of their aggressive rural reach, cost efficiency and the government’s rural schemes.

Mahindra and Mahindra meanwhile disappointed the street with a fall in operating margins. Sales however rose 78% this quarter, while profits more than doubled. The company says margins were under pressure on account of rising commodity prices. The board has also given the nod a 2-for-1 stock split.

Q: Have Maruti and M&M been in line with your estimates?
A: Maruti more or less met our estimates but Mahindra was a clear disappointment and this also clearly shows in the stock price which actually fell quite sharply post the results.

Q: What about the two-wheelers – Bajaj and Hero Honda? Both have seen robust volume growth. Do you think this pace of growth can be sustained?
A: The results were a lot better than what we were expecting for Bajaj Auto and there was clearly a positive surprise. If you are talking of Hero Honda the results were more or less in line with expectations.

But clearly going ahead we feel that the two wheeler market is getting saturated. We may not see the month on month growth that we have been seeing in the past couple of months to continue.

In fact we feel Hero Honda could be an underperformer because the way we see it is the future is basically in exports and Bajaj Auto being in that space could actually benefit. We are looking at this stock possibly coming down say about 10-15% from the current levels.

Q: Most auto companies have reported significant jump in their margins largely because they have benefited from relatively stable commodity prices. Do you think here on profitability is going to be at much lower level?

A: The last 2-3 quarters including the current quarter had the benefit of lower overhead costs and lower raw material costs although they are rising over the past couple of months. But I think the next 2-3 quarters you will clearly see the raw material costs hitting the bottom-line.

At the same time if we see the higher interest rates regime that will also hit the topline to a certain extent with sales being slightly lower than what people have been expecting. So I think these are two things to be watched out for and the raw material costs is on the way up clearly.

Q: Most auto industry leaders have spoken about the stimulus measures benefiting sales growth. The government has been talking bout withdrawing those measures although in a phased manner. What kind of impact will have that on the numbers of auto companies?
A: Instead of seeing a month on month decent growth of what we have seen in the past couple of months I think that will flatten out. I would not be surprised if you see for a couple of months a degrowth as far as the numbers are concerned. So that’s what this withdrawal of stimulus would do.

There are clear signals from the government that come budget surely the stimulus would be withdrawn looking at the talk coming from the finance minister he is talking about 7.75% GDP Growth, then I suppose there is no reason to have the stimulus on.