Auto Sector overview and outlook - Inventory correction restrict 2W dispatches; PV demand bottoming-out - Motilal Oswal

While retail sales have improved due to festivals in April this year against March last year, the underlying demand trends remain weak:

- Two-wheelers: Retail demand has been strong in Apr-13 considering the festivals in this month (v/s March last year). Our channel interaction indicates retail demand to have grown at a healthy rate YoY, though inventory correction restricted dispatches.

- Passenger vehicles: PV demand seems to be bottoming-out. Petrol segment is showing signs of recovery, though correspondingly diesel segment is moderating.

- MHCVs: The segment continues to witness pressure reflecting tough macroeconomic conditions. This coupled with higher competitive intensity has resulted in high level of discounting.

- Tractors: Strong growth in dispatches for M&M reflecting inventory correction undertaken in 4QFY13 and high retails due to festivals in April this year.

Expected softening in interest rates, and reform-led revival in business and consumer sentiment are key medium-term drivers for auto volumes.

4QFY13 margins to improve QoQ on favorable currency, stable RM cost

EBITDA margins for our Auto universe is expected to improve 70bp QoQ (-110 YoY) on favorable currency (JPY/INR) together with stable RM cost. Discount levels remain high across segments particularly for CVs and PVs. In two-wheelers there is no widespread cash discount, but OEMs are aggressively pushing finance schemes to spur demand.

Lower rates, price hikes, soft commodities cushion slowdown impact

Over the last few months, major auto financiers have cut lending rates. This augurs well for auto demand, particularly for PVs and CVs. Besides, on the back of further monetary easing, economic activity and consumer sentiment should improve. At the company level, price increases and softening commodity prices are positive to cushion the impact of slowdown on profitability.

Prefer Maruti Suzuki & Tata Motors in mid-caps we like Eicher Motors

With a positive view on interest rates and stable commodity prices, we believe that 4-Ws & CVs could see revival of performance. We prefer Maruti Suzuki and Tata Motors. In mid-caps, we like Eicher Motors.

Source : Equity Bulls

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