Companies & Sectors
Two-wheeler volumes weak in March; PV, CV volumes marginally above expectations

Volumes for two-wheeler companies were weak and below expectations, while companies in passenger vehicles (PV) and medium heavy commercial vehicles (MHCV) segments reported better-than-expected numbers

Auto sales continued to skid in March. Passenger car sales declined though Maruti Suzuki (MSIL) gained market share as its sales declined at a slower pace. Two-wheeler sales also plunged sharply, partially on delayed festive buying. However, Honda Motorcycles & Scooters’ (HMSI) bucked the trend, increasing its volumes and thereby gaining market share. Tata Motors’ MHCVs sales continued to fall, though the pace of decline was arrested. LCV volumes of Tata Motors and UV (Mahindra & Mahindra) volumes continued to expand, but moderated on a higher base, according to Edelweiss in its report on the auto industry volumes for March 2013. 
Most of the India auto makers have reported their sales numbers for March 2013. Overall, volumes for two-wheeler companies were weak and below expectations, while companies in passenger vehicles (PV) and medium heavy commercial vehicles (MHCV) segments reported better-than-expected numbers. These observations were made by Nomura Equity Research in its Quick Note on the industry.
“We estimate that two-wheeler industry volumes fell by 8% year-on-year (against our estimate of 2% drop). Two-wheeler companies under our coverage reported 8%-11% y-o-y decline in volumes while Honda Motorcycles & Scooters’ (HMSI) volumes were up 15% y-o-y,” the brokerage said.
Volumes in the car industry fell by around 20% y-o-y (against an estimate of a decline of 22%-24%); Maruti Suzuki India’s (MSIL) domestic volumes were 7% ahead of Nomura’s expectations and the company had 50% market share (in the passenger car industry) in March 2013.
As per Nomura’s calculations, volumes in the MHCV segment fell by 26% y-o-y (compared to Nomura’s estimate of a 30% decline). Industry SAAR has improved over the last two to three months though still remains below FY14F forecast of flat volumes.
The brokerage believes that the two-wheeler industry volumes are likely to remain weak and incumbents will face market share pressure as Honda’s new capacity is commissioned and it launches new models in the entry segment. Nomura continues to prefer four-wheeler companies and would avoid the two-wheeler space. MSIL and M&M remain the brokerage’s top picks in the sector.
Edelweiss’ take on the two-wheeler segment: Both Hero MotoCorp and Bajaj Auto reported declines of 11% each y-o-y. A part of this dip can be attributed to delayed onset of festive buying of Gudi Padwa. While TVS Motors’ volumes declined 11%, HMSI’s rose 15%.
Domestic volumes of unlisted companies
March 2013 volumes – Actual Vs Expectations

MSIL – March 2013 volumes above expectations
MSIL’s volumes fell by 4.8% y-o-y in March 2013 to 119,937 units. This is 6% ahead of Nomura’s estimate of 113,000 units. Volumes in the domestic segment came in above the brokerage’s expectation while domestic volumes fell by 4% y-o-y as compared to an estimate of a 10% decline.
MSIL volumes
Bajaj Auto – March 2013 volumes 9% below expectations
Bajaj Auto’s volumes came in at 301,231 units last month; down 10% y-o-y. This is 9% below Nomura’s expectation of 330,000 units. The brokerage attributed the miss to sharply lower exports volumes. Further, the decline in domestic volumes (down 12%) was higher than expectations of an 8% decline.
Exports volumes fell by 6% y-o-y compared to Nomura’s forecast of 12% growth. The company’s management said, “export volumes were impacted by 20,000 units as the company did not receive Mate’s receipt of the shipment by 31st March —these units will be billed in April 2013.” Adjusted for this, export volumes are in line with Nomura’s estimates; however, weaker domestic volumes remain a concern.
Ashok Leyland – MHCV volumes down 20% y-o-y; above expectations
Ashok Leyland’s March 2013 volumes fell by 2% y-o-y to 14,020 units, which is above the expectation of 12,500 units given by Nomura’s analysts. This was led by strong Dost volumes (4,325 versus Nomura’s estimate of 3,500) and lower-than-expected decline in the MHCV segment (20% decline compared to an estimated 25% decline).
SAAR for MHCVs has improved and is indicating flat volumes for FY14F (Nomura estimates 5% growth in FY14F). As per its estimates, the company gained some market share in last month which was quite positive. The brokerage is bullish on the stock and expects it to react positively to these numbers.
M&M – Tractor volumes above expectations
Mahindra & Mahindra’s (M&M) volumes in the auto sector increased by 11% y-o-y to 51,904 units, in line with Nomura’s estimate of 51,650 units. Growth in both the UVs (13%) and LCVs segment (17%) remained strong in March 2013.
However, tractor volumes for the month were flattish y-o-y at 17,330 units, which is above Nomura’s expectation of a 5% decline.
Meanwhile, Edelweiss points that M&M’s domestic tractor sales at 155,000 units dipped 2.3% y-o-y, but were ahead of its estimate of 14,000 units. Exports increased 20%, resulting in overall flat volumes.

M&M volumes
Tata Motors – Volumes 5% below Nomura’s estimate on lower PV volumes
Tata Motors’ volumes fell by 28% y-o-y to 72,712 units last month. This is 5% below expectation of 76,700 units estimated by the brokerage. The primary disappointment was in the passenger vehicle segment. Car volumes declined by 70% y-o-y and UV volumes fell by 49% y-o-y.
MHCV volumes fell by 32% y-o-y; marginally above Nomura’s forecast of a 36% decline (14,000 units).
Hero MotoCorp – Volumes down 11% y-o-y 
HMCL’s volumes fell by 11% in March to 468,283 units, below Nomura’s estimate of 514,000 units. The company continues to face market share pressures from Honda.
TVS Motors – Volumes down 8%
 TVS Motors’ volumes fell by 8% y-o-y to 167,583 units, which is 4% below expectations of 174,550 units estimated by Nomura in its Quick Note. The miss is largely due to weaker-than-expected volumes in the scooters segment (down 26% y-o-y) and a 6% decline in bike volumes. Exports volumes increased by 13% y-o-y to 23,342 units while domestic volumes declined by 11% y-o-y.


Network sharing pact with RIL subsidiary a shot in arm for RCom

Edelweiss believes the arrangement is a key positive for RCom as the brokerage perceives it as a right step in monetising its assets and thus deleveraging balance sheet. However, RIL’s entry in the telecom business could be foreseen as entry of a serious player with considerable balance sheet muscle

Reliance Communications (RCom) on Tuesday inked a definitive agreement with Reliance Jio Infocomm (RJI) in which the latter will share RCom’s nation-wide optic fibre network to roll out its 4G services. RJI, Reliance Industries’ 4G arm, will pay RCom a one-time fee of Rs12 billion for the same. The agreement also grants RCom access to the optic fibre infrastructure to be built by RJI. Edelweiss in its brokerage report said that the deal is intended to be a comprehensive framework for business co-operation between the two companies. It can also pave the way for further agreements in the tower assets, which may enhance Reliance Infratel’s tenancy ratios (RCom) has 50,000 towers in its tower arm Reliance Infratel).


Deal contours

• RCom to receive Rs12 billion as one-time indefeasible right to use fees for sharing its nation-wide inter-city fibre optic network infrastructure.

• RJI will utilise multiple fibre pairs across RCOM’s 120,000 km inter-city fibre optic network to provide a robust support for rolling out its state-of-the-art 4G services.

• RCom will have reciprocal access to optic fibre infrastructure to be built by RJI.

• The agreement provides for joint working arrangements to be put in place immediately for upgradation of the optic fibre network.

• This agreement is the first in an intended comprehensive framework of business co-operation between the two companies to provide for optimal utilisation of existing and future infrastructure.


Outlook and valuations: Positive; maintain ‘HOLD’

Edelweiss believes the arrangement is a key positive for RCom as the brokerage perceives it as a right step in monetising its assets and thus deleveraging balance sheet. However, Reliance Industries’ entry in the telecom business could be foreseen as entry of a serious player with considerable balance sheet muscle. Edelweiss maintains a ‘HOLD/Sector Underperformer’ with target price of Rs80 (based on DCF).


On the other hand, Nomura Equity Research says the deal is a win-win for both collaborators, but adds that a lot more work needs to be done. If there is further collaboration between RCom and RIL, this will create another well-funded player in the market with networks, distribution, customers, spectrum and importantly, cash flows. RIL is a net cash company while RCom has around $7.5 billion in net debt. This could benefit both RIL (in terms of accelerating the rollout) and RCom (in terms of deleveraging its balance sheet). However, there are likely to be regulatory, and various other, hurdles to overcome such as spectrum sharing, etc.


Is the worst for earnings growth behind us?

According to Morgan Stanley, over the past five years growth expectations have moderated into fair territory and corporate India’s earnings could rise 15%-20% over the next 12 months

Since the end of the previous bull market in early 2008, the direction of Indian stock market has been determined largely by the change in its multiple. “Our earnings growth-leading indicator suggests that the worst for earnings growth is over and we believe that a new earnings cycle is taking shape,” says Morgan Stanley in a research report.
The note said, “Over the past five years, falling gross margins and rising interest rates were prime reasons for compressed earnings growth. Both appear to be reversing. From a top-down angle, a collapse in the investment rate and the widening current account deficit (CAD) explains the fall in the share of profits in gross domestic product (GDP).” 
Since 2008, the market multiple has more than halved, causing the market to be down 14% from the end of December 2007 even though earnings have nearly doubled—up 85%. The period between 2003 and 2008 was much more rewarding for both multiples and returns—the multiple nearly tripled and earnings were up 2.5x, leading to a near seven-fold rise in the index (Exhibit 3). 
Over 20 years, the market has de-rated, highlighting the high expectations that were embedded in stock prices two decades ago. At the same time, the multiple has fallen 60% but earnings have grown 10-fold, implying that the MSCI Index is up over 4x, the report said. 
According to Morgan Stanley, if performance is an indication, then the market is dismissing the prospects of an earnings recovery. While the investment rate is stabilizing and recovering from its low point, the CAD may have seen its worst in the December 2012 quarter given fiscal consolidation and an Indian rupee that is no longer undervalued. “We believe that the earnings growth could rise to 15%-20% by the end of the next 12 months,” the report added.


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