Monthly Update | August 2011

September 2, 2011 Yaresh Kothari

+91 22 39357800 Ext: 6844 [email protected]

Automobile Sector
Festivities yet to come
Auto sales continued its mixed trend in August 2011 as well, as demand for two-wheelers, utility vehicles (UV) and light commercial vehicles (LCV) maintained their healthy volume momentum; however, passenger car and medium and heavy commercial vehicles (M&HCV) continued to be affected by macro headwinds in the form of higher interest rates and fuel prices. Mahindra and Mahindra (M&M) reported better-than-expected volumes, driven by strong performance of its automotive and tractor segment, while Maruti's sales continued to be impacted by sluggish domestic demand and production loss at the Manesar plant. Going ahead, we expect the two-wheeler segment to sustain its volume momentum; however, the passenger vehicle (PV) segments demand is likely to improve with the onset of the festive season. Tata Motors (TML) reported a 2.8% yoy (up 0.8% mom) drop in its total volumes, primarily led by a 34.6% yoy (4.5% mom) decline in the PV segment. However, CV sales continued to remain strong, driven by robust momentum in the LCV segment, which jumped by 27.1% yoy (2.4% mom). The PV segment continued its disappointing run as Nano sales plunged by 85% yoy and Indigo and Indica sales declined by 24% and 4% yoy, respectively. Maruti recorded a 12.7% yoy (up 21.4% mom) decline in its total volumes to 91,442 units on account of continued slowdown in the domestic passenger car segment and due to disruption in production at the Manesar plant because of labour issues. Total domestic volumes witnessed a 16.8% yoy (up 15.9% mom) drop to 77,086 units, led by a 26.9% and 18.3% yoy decline in the compact and mini segments, respectively. However, the companys exports buckled the downward trend and posted 18.5% yoy growth (63.2% mom). M&M maintained its strong momentum and reported better-than-expected volume growth of 26.8% yoy (down 4.7% mom) in total sales to 53,687 units. The companys performance was aided by robust 30.4% yoy (down 4.9% mom) growth in automotive sales and healthy 19.1% yoy growth (down 4.3% mom) in tractor sales. The automotive segments growth was driven by robust 66.8% yoy (down 6.7% mom) jump in the four-wheeler pick-up segment and 26% yoy (18.5% mom) growth in the three-wheeler segment. Two-wheelers and three-wheelers: Bajaj Auto (BAL) registered marginally better-than-expected volume growth of 16.2% yoy (5.2% mom) to 382,739 units, as the motorcycle segment posted the highest-ever monthly sales during August 2011. Hero MotoCorp continued to lead the two-wheeler pack and posted robust volume growth of 18.6% yoy (2.6% mom). TVS reported 14.2% yoy (1.5% mom) growth in total volumes to 194,898 units, driven by continued growth in domestic as well as exports sales.

Please refer to important disclosures at the end of this report

Auto Sector Update | August 2011

Tata Motors
CV volumes continue to be driven by the LCV segment; PV sales continue to disappoint TML reported a 2.8% yoy (up 0.8% mom) decline in total volumes to 64,078 units, led by continued weakness in PV volumes, which witnessed a 34.6% yoy (4.5% mom) decline in sales. CV sales were marginally ahead of expectations, posting strong growth of 18.2% yoy (2.9% mom) to 46,953 units. Performance in the CV segment was led by strong momentum in the LCV segment, which grew by 27.1% yoy (2.4% mom). The M&HCV segment grew by 5.8% yoy (3.6% mom). The PV segments sales continued the disappointing run; Nano dispatches plunged by 85% yoy to 1,202 units, while Indica and Indigo sales declined by 4% and 24% yoy, respectively. Production at the Sanand plant was shut for about a fortnight in August for maintenance purposes and to rationalise and align inventory levels.

Exhibit 1: Tata Motors Sales trend

Segment Total sales M&HCV LCV Total CV Utility vehicles Cars Total PV Export (Included above) Source: Company, Angel Research August 2011 64,078 17,683 29,270 46,953 3,418 13,707 17,125 4,204 August 2010 65,938 16,716 23,022 39,738 2,993 23,207 26,200 5,157 % chg (2.8) 5.8 27.1 18.2 14.2 (40.9) (34.6) (18.5) YTD FY2012 320,878 83,971 134,633 218,604 17,617 84,657 102,274 24,861 YTD FY2011 315,445 78,463 107,628 186,091 16,108 % chg 1.7 7.0 25.1 17.5 9.4

113,246 (25.2) 129,354 (20.9) 21,641 14.9

Exhibit 2: CV segment Monthly sales trend

(units) 60,000 50,000 40,000 30,000 20,000 10,000 0 Volume(LHS) yoy growth (RHS) (%) 160 140 120 100 80 60 40 20 0

Dec-09

Dec-10

Apr-10

Aug-09

Aug-10

Apr-11

Source: Company, Angel Research

September 2, 2011

Aug-11

Oct-09

Feb-10

Oct-10

Feb-11

Jun-10

Jun-11

Auto Sector Update | August 2011

Exhibit 3: PV segment Monthly sales trend

(units 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Oct-09 Feb-10 Oct-10 Dec-09 Dec-10 Feb-11 Jun-10 Apr-10 Aug-09 Aug-10 Apr-11 Jun-11 Aug-11
(8.3) (3.3) 41,795 (13.9) 7,994 3,541 61,295 21.5 (3.0) 8.7 (7.4) 63,297 (14.7)

Volume(LHS)

yoy growth (RHS)

(%) 80 60 40 20 0 (20) (40) (60)

Source: Company, Angel Research

Maruti
Sluggish domestic demand and loss in production at the Manesar plant continue to affect domestic volumes Maruti reported in-line sales volume for August 2011, posting a 12.7% yoy (up 21.4% mom) decline in volumes to 91,442 units. Volume performance continues to be affected by the slowdown in the domestic passenger vehicle segment and due to disruption in production at the Manesar plant because of labour issues. Domestic volumes declined by 16.8% yoy (up 15.9% mom), while exports buckled the downward trend and posted 18.5% yoy (up 63.2% mom) growth. As per the new SIAM classification, volumes in the mini, compact, super compact and vans segments declined by 18.3% (down 1.4% mom), 26.9% (up 76.3% mom), 6.8% (up 160% mom) and 11.7% yoy (down 6.6% mom), respectively. Maruti unveiled the next generation new Swift during August 2011.

Exhibit 4: Maruti Sales trend

Segment Total sales A: Mini: M800, A-star, Alto, Wagon R A: Compact: Swift, Estilo, Ritz A: Super Compact: Dzire A: Mid-Size: SX4 A: Executive: Kizashi Total passenger vehicles B: UV - Gypsy, Grand Vitara C: Vans: Omni, EeCo Total domestic sales Total exports Source: Company, Angel Research August 2011 91,442 37,496 16,043 7,856 1,893 8 63,296 1,290 12,500 77,086 14,356 August 2010 104,791 45,917 21,955 8,431 2,048 78,351 166 14,157 92,674 12,117 % chg YTD FY2012 YTD % chg FY2011 (12.7) 448,268 488,972 (18.3) 197,576 204,214 (26.9) (6.8) (7.6) 677.1 (11.7) 18.5 35,972 9,713 157 3,434 66,628 53,995

80,793 106,836 (24.4)

(19.2) 324,211 360,839 (10.2)

(16.8) 394,273 425,675

September 2, 2011

Auto Sector Update | August 2011

Exhibit 5: PV segment Monthly sales trend

(units) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Volume(LHS) yoy growth (RHS) (%) 80 60 40 20 0 (20) (40)

Oct-09

Feb-10

Oct-10

Dec-09

Dec-10

Feb-11

Jun-10

Apr-10

Aug-09

Aug-10

Apr-11

Jun-11

Source: Company, Angel Research

Mahindra & Mahindra

M&M continues to report robust monthly performance, driven by strong growth in the automotive and tractor segments M&M continued to report better-than-expected volume numbers, driven by strong performance across all product segments. During August 2011, the automotive segment reported strong growth of 30.4% yoy (down 4.9% mom) to 37,684 units, while the tractors segment posted healthy 19.1% yoy (down 4.3% mom) growth to 16,003 units. As a result, total volumes registered impressive growth of 26.8% yoy (down 4.7% mom) to 53,687 units. In the automotive segment, the four-wheeler pick-up segment continued its impressive run, posting 66.8% yoy (down 6.7% mom) growth. Logan sales continued the strong momentum, registering growth of 113.5% yoy (4.9% mom), while three-wheeler sales grew by 26% yoy (18.5% mom). Within the tractors space, domestic sales reported a strong 20.9% yoy (down 4.1% mom) increase in volumes to 15,059 units, while exports volumes declined marginally by 3.9% yoy (down 7.4% mom).

Exhibit 6: Mahindra & Mahindra Sales trend

Segment Total sales Passenger utility vehicles (UV) Four-wheel pick-up (GIO + Maxximo) Three-wheelers Logan/Verito LCV/M&HCV Exports Total automotive sales Tractor sales Domestic Tractor sales Exports Total tractor sales Source: Company, Angel Research August 2011 53,687 13,954 12,563 6,394 1,710 1,135 1,928 37,684 15,059 944 16,003 August % chg 2010 42,339 12,995 7,533 5,074 872 1,628 28,903 12,454 982 13,436 7.4 66.8 26.0 30.2 18.4 20.9 (3.9) 19.1 YTD FY2012 74,043 57,091 25,847 7,147 5,231 9,955 88,002 4,871 92,873 YTD % chg FY2011 25.3 15.8 51.9 14.1 7.7 39.3 29.0 19.4 8.9 18.8 63,930 37,580 22,660 4,857 7,149 73,704 4,472 78,176 26.8 272,161 217,221

801 113.5

2,869 149.1

30.4 179,314 139,045

September 2, 2011

Aug-11

Auto Sector Update | August 2011

Exhibit 7: UV segment Monthly sales trend

(units) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Volume (LHS) yoy growth (RHS) (%) 140 120 100 80 60 40 20 0 (20)

Dec-09

Aug-09

Aug-10

Dec-10

Source: Company, Angel Research; Note: UV+Four-wheel pick-up combined from September 2010

Exhibit 8: Tractor segment Monthly sales trend

(units) 30,000 25,000 20,000 15,000 10,000 5,000 0 Volume (LHS) yoy growth (RHS) (%) 180 160 140 120 100 80 60 40 20 0 (20)

Dec-09

Dec-10

Apr-10

Aug-09

Aug-10

Apr-11

Source: Company, Angel Research

September 2, 2011

Aug-11

Oct-09

Feb-10

Oct-10

Feb-11

Jun-10

Jun-11

Aug-11

Apr-10

Oct-09

Feb-10

Oct-10

Feb-11

Apr-11

Jun-10

Jun-11

Auto Sector Update | August 2011

Bajaj Auto
BAL reported the highest-ever motorcycle sales in August 2011, with Pulsar and Discover accounting for ~65% of sales BAL reported slightly better-than-expected volume growth of 16.2% yoy (5.2% mom) to 382,739 units, led by 16.9% yoy growth (6.3% mom) in the motorcycle segment and an 11.2% yoy (down 2% mom) increase in the three-wheeler segment. Pulsar and Discover accounted for ~65% of overall motorcycle sales, with Discover registering 130,000 units and Pulsar reporting 87,500 units. Three-wheeler sales stood at 44,685 units. Exports continued its strong momentum, reporting 40.2% yoy (down 4% mom) growth to 138,225 units. Management expects to increase the market share in the motorcycle segment to ~30% by December 2011 as against the current market share of ~26%.

Exhibit 9: Bajaj Auto Sales trend

Segment Total sales Motorcycles Three-wheelers Exports (Included above) August 2011 382,739 338,054 44,685 138,225 August 2010 329,364 289,176 40,188 98,578 % chg 16.2 16.9 11.2 40.2 YTD FY2012 1,839,266 1,619,200 220,066 709,585 YTD FY2011 1,576,115 1,397,348 178,740 529,271 % chg 16.7 15.9 23.1 34.1

Source: Company, Angel Research

Exhibit 10: Motorcycle segment Monthly sales trend

(units) 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Volume (LHS) % yoy growth (RHS) (%) 120 100 80 60 40 20 0

Oct-09

Feb-10

Oct-10

Dec-09

Dec-10

Feb-11

Jun-10

Apr-10

Aug-09

Aug-10

Apr-11

Jun-11

Source: Company, Angel Research

September 2, 2011

Aug-11

Auto Sector Update | August 2011

Exhibit 11: Three-wheeler segment Monthly sales trend

(units) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Volume (LHS) % yoy growth (RHS) (%) 120 100 80 60 40 20 0 (20)

Dec-09

Dec-10

Apr-10

Aug-09

Aug-10

Apr-11

Source: Company, Angel Research

Hero MotoCorp
Hero MotoCorp continued to lead the two-wheeler pack and posted strong 18.6% yoy growth Hero MotoCorp reported in-line 18.6% yoy growth (2.6% mom) in volumes to 503,654 units, led by strong momentum across all product segments. New product launches and refreshed product ranges continued to drive the companys volume performance.

Exhibit 12: Hero MotoCorp Sales trend

August 2011 Total sales Source: Company, Angel Research 503,654 August 2010 % chg YTD FY2012 YTD FY2011 % chg 21.0 424,617 18.6 2,524,267 2,086,342

Exhibit 13: Two-wheeler segment Monthly sales trend

(units) 600,000 500,000 400,000 300,000 200,000 100,000 0 Volume(LHS) yoy growth (RHS) (%) 80 70 60 50 40 30 20 10 0 (10)

Dec-09

Dec-10

Apr-10

Aug-09

Aug-10

Apr-11

Source: Company, Angel Research

September 2, 2011

Aug-11

Oct-09

Feb-10

Oct-10

Feb-11

Jun-10

Jun-11

Aug-11

Oct-09

Feb-10

Oct-10

Feb-11

Jun-10

Jun-11

Auto Sector Update | August 2011

TVS Motor
TVS continued its growth momentum on the back of strong performance on the domestic as well as exports fronts TVS reported marginally better-than-expected 14.2% yoy (1.5% mom) growth in total volumes to 194,898 units. The strong performance was supported by 13.8% yoy (0.9% mom) growth in the two-wheeler segment and 30% yoy (34.7% qoq) growth in the three-wheeler segment. In the two-wheeler segment, motorcycle volumes grew by healthy 16.8% yoy (7.2% mom) to 77,726 units. Scooter sales continued to register strong volumes, posting 27.7% yoy (4.5% mom) growth to 52,253 units. Exports volume also maintained its strong traction, registering impressive 48.1% yoy (9% mom) growth to 29,984 units.

Exhibit 14: TVS Motor Sales trend

Segment Total sales Motorcycles Scooters Mopeds Total two-wheelers Exports (Included above) Three-wheelers Source: Company, Angel Research August 2011 194,898 77,726 52,253 60,205 190,184 29,984 4,714 August 2010 170,735 66,574 40,913 59,622 167,109 20,245 3,626 % chg YTD FY2012 YTD FY2011 % chg 15.3 11.4 24.3 13.1 14.9 42.7 35.1 14.2 923,028 800,789 16.8 365,277 327,983 27.7 219,776 176,756 1.0 318,338 281,517 13.8 903,391 786,256 48.1 135,286 30.0 19,637 94,795 14,533

Exhibit 15: Scooter segment Monthly sales trend

(units) 60,000 50,000 40,000 30,000 20,000 10,000 0 Volume (LHS) yoy growth (RHS) (%) 100 90 80 70 60 50 40 30 20 10 0

Oct-09

Feb-10

Oct-10

Dec-09

Dec-10

Feb-11

Jun-10

Apr-10

Aug-09

Aug-10

Apr-11

Jun-11

Source: Company, Angel Research

September 2, 2011

Aug-11

Auto Sector Update | August 2011

Exhibit 16: Motorcycle segment Monthly sales trend

(units) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Volume (LHS) yoy growth (RHS) (%) 60 50 40 30 20 10 0 (10) (20)

Oct-09

Feb-10

Oct-10

Dec-09

Dec-10

Feb-11

Jun-10

Apr-10

Aug-09

Aug-10

Apr-11

Jun-11
3.4 9.9 8.9 5.7 8.7 3.3 5.1

Source: Company, Angel Research

Outlook
Considering the near-term macroeconomic challenges, we expect the auto industry to register moderate volume growth of 1213% for FY2012. However, we believe low penetration levels coupled with a healthy and sustainable economic environment and favourable demographics supported by increasing per capita income levels will drive long-term growth of the Indian auto industry. As such, we prefer stocks that have strong fundamentals, ability to deliver a strong top-line performance and are available at attractive valuations. We continue to prefer companies with a strong pricing power and high exposure to rural and exports markets.

Exhibit 17: Relative valuation and recommendation

Companies Ashok Leyland Bajaj Auto Maruti M&M Tata Motors TVS Motor Reco. Buy Neutral Buy Accumulate Buy Accumulate CMP (`) 25 1,624 2,068 1,081 766 755 57 TP (`) 31 1,300 815 917 62 Sales (`cr) FY12E 12,792 19,717 22,511 38,537 27,108 140,283 7,502 14,497 22,544 25,192 44,813 30,880 154,696 8,585 P/E (x) 11.2 16.8 18.6 13.0 16.2 5.5 12.3 9.0 16.1 16.9 10.8 14.8 4.9 10.9 P/BV (x) 1.2 7.8 10.8 1.9 3.8 1.9 2.4 1.0 6.3 9.4 1.6 3.2 1.4 2.0 RoE (%) 14.9 51.3 65.3 15.7 25.2 39.4 20.5 17.3 43.5 59.2 16.1 23.6 33.6 20.0 EV/EBITDA (x) 4.0 11.1 10.8 7.5 10.5 3.9 6.0 FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY11-13E EPS CAGR (%) 9.2 3.0 10.2 13.3 9.5 4.3 13.8

Hero MotoCorp Neutral

Source: Company, C-line, Angel Research; Note: Price as on September 2, 2011

September 2, 2011

Aug-11

Auto Sector Update | August 2011

Research Team Tel: 022 - 3935 7800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Analyst ownership of the stock Ashok Leyland Tata Motors Maruti Suzuki Mahindra & Mahindra Bajaj Auto Hero Honda TVS Motor No No No No No No No Angel and its Group companies ownership of the stock No No No No No No No Angel and its Group companies' Directors ownership of the stock No No No No No No No Broking relationship with company covered No No No No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

September 2, 2011

10

Auto Sector Update | August 2011

6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai - 400 093. Tel: (022) 39357800 Research Team
Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Shailesh Kanani Srishti Anand Bhavesh Chauhan Sharan Lillaney V Srinivasan Yaresh Kothari Shrinivas Bhutda Sreekanth P.V.S Hemang Thaker Nitin Arora Ankita Somani Varun Varma Technicals: Shardul Kulkarni Sameet Chavan Derivatives: Siddarth Bhamre Jaya Agarwal Institutional Sales Team: Mayuresh Joshi Abhimanyu Sofat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Simran Kaur Dilip Patel Research Editor Production [email protected] [email protected] VP - Institutional Sales AVP - Institutional Sales Dealer Dealer Dealer [email protected] [email protected] [email protected] [email protected] [email protected] Head - Derivatives Derivative Analyst [email protected] [email protected] Sr. Technical Analyst Technical Analyst [email protected] [email protected] VP-Research, Pharmaceutical VP-Research, Banking Infrastructure IT, Telecom Metals, Mining Mid-cap Research Associate (Cement, Power) Research Associate (Automobile) Research Associate (Banking) Research Associate (FMCG, Media) Research Associate (Capital Goods) Research Associate (Infra, Real Estate) Research Associate (IT, Telecom) Research Associate (Banking) [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946 Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

September 2, 2011

11