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com June 04, 2009

Q4FY2009 Auto earnings review

Sequentially higher volumes, softening raw material prices improves performance

Key points  With the improvement in the liquidity condition in the

 The Q4FY2009 results of the automobile sector were
mixed, even though the performance improved
significantly quarter on quarter. The improvement was
led by a better volume growth and easing of margins on
the back of softening commodity prices during the fourth
quarter. In the quarter, the net sales of the Sharekhan
automobile universe improved by 17.3% while the
margins remained under pressure, leading to a flattish
profit growth of 1%.
 The revenues improved across the two-wheeler and four-
wheeler segments with the quarter witnessing a revival
of sorts. Easing liquidity condition combined with the
positive effect of the recent government measures to
boost the economy clearly had a positive impact on the
volumes. The excise duty cuts effected by the
government in its various stimulus packages were the
single most important factor that positively affected
the sales of the four-wheeler industry.
 On the valuation front, we find some of the front-line
 Though there was a margin respite across the sector,
the industry leaders continued to outperform the industry.
Maruti Suzuki and Hero Honda Motors outperformed their
peers by a long margin in their respective segments while
the other players continued to struggle. The medium and
heavy commercial vehicle (M&HCV) segment continued
to slide during the quarter while the light commercial
vehicle (LCV) segment gained some respite.
economy and the government measures, the sector saw
a smart revival in Q4FY2009 after a disastrous
Q3FY2009. However, the industry data continues to be
mixed with the leaders continuing to gain market share.
Even a look at the industry numbers for May 2009 in the
passenger car segment tells the same story: Though
Maruti Suzuki posted an impressive growth of 11.6% in
the domestic market, its peers such as Hyundai Motor
India and Tata Motors disappointed with a decline of 4%
and 9.8% respectively in the domestic market. A similar
trend was noticed in the two-wheeler market, where
Hero Honda Motors continued to build on its market
share while Bajaj Auto failed to arrest the fall in its
market share. In view of the mixed performance, it is
difficult to say whether the revival seen in the recent
past is temporary and the sector’s future performance
needs to be watched very carefully. We continue to keep
our ears on the ground to pick up further signals.
automobile stocks expensive, as these are trading
higher than their historic average and at a significant
premium to the Sensex. Consequently, we adopt a very
cautious approach to the industry, choosing Bajaj Auto
and Mahindra and Mahindra (M&M) as our top
automobile picks.

Auto: Q4FY2009 results review Rs (cr)

Particulars Net sales OPM (%) Adj. PAT
Q4FY09 Q4FY08 % yoy Q4FY09 Q4FY08 bps chg Q4FY09 Q4FY08 % yoy
Maruti Suzuki 6,334.4 4,783.9 32.4 7.5 11.1 -359 324.2 423.4 -23.4
Bajaj Auto 1,883.4 2,164.3 -13.0 15.2 12.1 309 213.2 171.8 24.0
Mahindra & Mahindra 3,619.2 3,142.2 15.2 11.1 11.4 -24 279.5 205.5 36.0
Subros 215.4 187.7 14.7 7.1 13.0 -589 0.8 8.9 -91.2
Auto sector average 12,052.4 10,278.2 17.3 9.8 11.4 -163 817.6 809.5 1.0

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sharekhan special
Maruti Suzuki
 Maruti Suzuki’s performance was slightly below
expectations as its revenues grew by a strong 32.4%,
driven by a brilliant volume growth of 17% in the fourth
quarter. Adjusting for the loss on forward contracts, the
operating profit margin (OPM) stood at 7.5% (down 360
basis points year on year [yoy]) due to higher raw
material cost and royalty because of a change in the
product mix.
 The management continues to monitor the situation and
is still uncertain when the fortunes of the industry would
revive. After a strong volume growth in the last quarter,
the volume growth continued to be strong for the
company in the months of April and May.
 We continue to believe that the company would handle
the slowdown better than its peers and be the best placed
to take advantage of a revival.
 Nevertheless, we find the stock expensive on the
valuation front, as it quotes higher than its historic mean
of 14.2x one-year forward earnings. We think that the
current valuation is already factoring in the continued
strong growth in the company’s volume, a significant
growth on the export front and improved margins on
account of a higher level of localisation combined with
lower raw material prices. In such a scenario, any
deviation from these expectations could pose a risk to
the stock and increase the downside potential. However,
in view of the company’s consistent outperformance
compared with its peers, its strong stature in the industry
and improved sentiments of the market, we are raising
our valuation multiple for Maruti Suzuki to 15x its one-
year forward earnings (average of FY2010E and FY2011E
earnings). We maintain our Reduce recommendation on
the stock with a revised price target of Rs880.
Bajaj Auto
 Bajaj Auto delivered a strong performance in Q4FY2009,
on the back of a stronger than expected margin despite
slower volumes. The total income for the quarter
declined by 13% yoy to Rs1,883.4 crore, primarily on
the back of a volume decline of 20.3% yoy. However, an
8.1% increase yoy in the realisation resulted in a lower
than expected decline in the net income.
 On the positive side, the OPM improved during the
quarter, rising by 257 basis points to 15.2% on the back
of an improved product mix (more higher-end
motorcycles), strong exports and the positive effect of
Sharekhan Special
Q4FY2009 Auto earnings review
the rupee’s depreciation on exports, the 13% decline in
the raw material cost and a higher production at its
Pantnagar plant. A higher other income, and lower
depreciation and taxes because of tax exemption from
the Pantnagar plant led to a 24% growth in the adjusted
profit to Rs213.15 crore.
 In the last couple of quarters Bajaj Auto has consistently
lost market share to its archrival Hero Honda Motors.
With a number of new launches lined up (four new
products, two each in the motorcycle and the three-
wheeler segment), the company hopes to regain some
of its lost share.
 We continue to believe that the success of the new
launches is the key to the future performance of Bajaj
Auto, as it should aid in arresting the steep fall in the
company’s volumes.
 We have valued the core business of the company at
14x FY2011E earnings and its investments at a discount
of 50%. This gives us a price target of Rs1,126. We
maintain our Hold recommendation on the stock.
Mahindra and Mahindra
 Mahindra and Mahindra reported a strong performance
for the quarter despite the fact that the numbers are
not comparable with the previous year’s due to the
amalgamation of Punjab Tractors with the company. The
stand-alone revenues grew by 15.2% yoy to Rs3,619.2
crore during the quarter led by a strong performance of
the farm equipment division. The automotive segment
reported a 5.4% increase in its revenues on the back of
the stupendous performance of Bolero and Xylo. The
farm equipment segment’s revenue grew by 47.7% yoy
with the addition of the Swaraj division. Adjusting for
a number of extraordinary items, the OPM stood at 11.1%
as against 11.4% in the same quarter last year while the
adjusted profit rose by 26.4% to Rs279.5 crore (ahead
of our estimate).
 Launch of new products in the utility vehicle space
combined with the excellent performance of the Swaraj
division led to the strong performance of the company.
In the tractor division, it not only consolidated its
presence with a share of over 40%, but also brought
about the impressive turnaround of the Swaraj division.
 However, on the valuation front, we think that currently
the stock captures more or less all of the future growth
and the upside thereupon. Hence, we maintain our Hold
recommendation on the stock.
2 June 04, 2009
sharekhan special Q4FY2009 Auto earnings review

Sector valuations
Company P/E (x) EV/EBIDTA (x)
FY2010 FY2011 FY2010 FY2011
Maruti Suzuki 19.4 17.4 12.3 10.2
M&M 18.9 17.3 12.0 11.2
Bajaj Auto 16.9 14.5 14.3 11.3
Hero Honda* 18.2 16.7 10.4 8.9
Ashok Leyland* 19.9 16.2 10.7 8.3
Tata Motors* 21.3 17.2 10.9 8.7
* Bloomberg consensus estimates

The author doesn’t hold any investment in any of the companies mentioned in the article.

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Sharekhan Special 3 June 04, 2009