Strong growth in tractor volumes are driven by improved customer sentiment on expectations of a good monsoon this year and improved Rabi crop realizations, says Nomura Equity Research in its Quick Note on the automobile industry

Most of the auto companies have reported May 2013 sales volumes. Overall, volumes were below expectations for cars and MHCVs, while tractor volumes surprised positively. “Mahindra & Mahindra’s (M&M) volumes were up by 24% y-o-y as compared to our estimate of 8% growth. As well, tractor volumes for Escorts were strong and increased by 18% y-o-y. We believe that strong growth in tractor volumes are driven by improved customer sentiment on expectations of a good monsoon this year and improved Rabi crop realizations,” said Nomura Equity Research in its Quick Note on the industry. The brokerage prefers to watch for volume growth over the next 1-2 months to see if FY14F could see a strong turnaround in the sector.

As per Nomura’s calculations, domestic volumes for the car industry fell by 12% y-o-y as against its estimate of a 7% decline. Maruti Suzuki’s (MSIL) domestic volumes fell by 13% while Nomura was expecting a 4% decline. As per its discussions with the management MSIL’s retail volumes were flat y-o-y in May 2013 and wholesale volumes were impacted by inventory reductions to some extent. “MSIL is confident of achieving its full-year volume growth target of 6% (versus our estimate of 6.5% growth),” said Nomura.

Amongst unlisted companies, Toyota and Ford have seen 30%+ declines. Honda’s volumes were up 10% led by the launch of Amaze. GM volumes increased by 40% y-o-y led by launch of new MPV Enjoy and continued good customer response for its Sail sedan, according to Nomura.

Nomura estimates that volumes in the MHCV industry declined by around 17% y-o-y as compared to its estimate of 9% decline. Both Tata Motors’ (TTMT) and Ashok Leyland’s (AL) volumes were weaker than the brokerage’s expectations. TTMT reported a 19% fall in volumes while AL’s volumes were down 22% y-o-y. Eicher’s total CV volumes increased by 2% y-o-y.

Domestic two-wheeler industry volumes were up 2% y-o-y in May-13, which was in line with Nomura’s estimates. Hero MotoCorp’s (HMCL) volumes were flat y-o-y; above the brokerage’s forecast of 5% decline. Honda Motorcycle & Scooter’s (HMSI) volumes were up only 3% y-o-y at around 230,000 units (around 260,000 units in April 2013); bike volumes fell by 4% y-o-y. Bajaj Auto’s domestic bike volumes increased by 3%, while TVS’ volumes were down 8% y-o-y.
 

Nomura adds that production from HMSI’s new plant (1.2mn annual capacity) will begin from June 2013; thus, volumes over the next 2-3 months will be critical as incumbents (HMCL and Bajaj Auto) might face further market share pressures.

Strong improvement in tractor volumes is quite positive for M&M, says Nomura. If the current trend continues we can see strong double-digit growth in FY14F. The brokerage is currently looking at 8% volume growth for tractors in FY14F. In terms of sensitivity, 5% higher tractor volumes can increase its core EPS estimates (M&M + MVML) by around 3%. For M&M, volume growth in passenger vehicles was 5% in May 2013 and LCV volumes were up 12% which is marginally ahead of Nomura’s estimates. Further, strong growth in Ssangyong volumes (up 25% in May) also augurs well for M&M, says Nomura.

For Maruti, Nomura expects earnings growth to remain strong over the next two years driven by margin improvement and recovery in car industry volumes in FY15F. Therefore, any decline in stock price should be used as a buying opportunity, opines Nomura.