An alarming monsoon deficiency is certainly a matter
of concern, where the cumulative rainfalls received by
the country as a whole was a sharp 29.2% below normal
till the week ended August 12, 2009. The resultant jitters
could be felt by the players in the Auto sector who have
a greater dependency on the rural areas.
We believe that the volumes would get impacted, but
will be limited to a certain extent on account of the
manufacturers having backup in the form of new
launches, concentrating on high end models also in the
near term the onset of the festive season will help
them to build up significant inventories in the Tier I
and Metro cities.
There are pockets of the country where certainly the
deficient monsoon does pose some concern. But going
forward, looking at the government stimuli, on back of
an increase in the allocation of NREGA coupled with a
higher minimum support prices for farm produce and
the interest subvention schemes, we believe the impact
would be limited.
We believe that the impact of below normal monsoon
will be minimal to players like Maruti Suzuki and Bajaj
Auto due to a much lesser proportion of total sales
coming from rural areas. However players like Mahindra
& Mahindra (more than one third of total sales
(standalone) come from tractor division) and Hero
Honda (~45% of total sales come from rural areas)
having much higher exposure to the rural markets
(agriculture dependent) are likely to be the most
impacted.
Maruti Suzuki—Minimal impact
Maruti Suzuki is the market leader in the passenger car
segment, with volumes outperforming the industry. The
company has an exposure of approximately 12-13% of
its total sales in the rural areas and is likely to see very
minimal impact of the deficient monsoons.
Moreover, we have recently seen that the company has
changed its product mix towards high end models. The
management had also indicated that the change in
product mix is mainly due to a change in the sales ratio
of diesel version cars to petrol version cars, which have
changed from 40:60 earlier to 60:40 currently, (Diesel
version cars being high priced) particularly in the A2and
the A3 segment.
Also a combination of finance becoming easier, the rate
of interest softening a bit will help the urban buyers to
go in for new buying. Thus we feel that the picking up
of demand in the urban areas will lessen the impact of
the depleted monsoons and would make up for the loss
in the rural markets.
We maintain our Hold recommendation on the stock
with a price target of Rs1,394.
Mahindra & Mahindra—Tractor volumes to be affected
in FY2011.
Credit availability has been an important demand driver
for the tractor industry, with around 85-90 per cent of
tractors being bought on credit.
M&M, with a 43% market share in the tractor segment
has the maximum exposure to any deviation in the
monsoons. Normally, the buying in the tractor segment
is done before monsoons every year; thereby the lag
effect of bad monsoons can be seen in the sales volumes
of next year. We highlight the impact of monsoons in
FY2001, where the monsoons were 12% below normal.
During FY2001, the company's tractor sales grew by
12.3% yoy, which was due to relatively better monsoons
in FY2000 (most of the buying being done before the
monsoons). However, the lag effect of below normal
monsoons in FY2001 was seen in FY2002, where the
sales of tractors declined by 27.2% yoy.
With the amalgamation of PTL with itself, the company
has outperformed the industry with a growth of 44% in
the first quarter of FY2010 against an industry growth
of 13.9% for the same period. We feel that the lag
effect of the below normal monsoon could be seen in
the next year.
However, with the government announcing certain
positives for the sector, with greater agricultural credit
flow target at Rs3.25 lakh crores for FY2010,continuation of the interest subvention scheme for
short term crop loans, extension of agricultural debt
waiver scheme till December 31, 2009 could limit the
downside risk.
The company also sells around 50-55% of its total UV
volumes in the rural markets. Considering that most of
the growth going forward will come from the volumes
of Xylo and the new version of Scorpio launched in March
2009 (which captures the urban markets) and the
management indicating that most of the rural sales in
UV's is linked to the commercial operators in the rural
areas, we feel that UV sales will not be impacted much.
Considering the increased risk to the tractor volumes
going forward, we reduce our target multiple for the
standalone business from 12x to 10x. Consequently our
new SOTP based target prices stands at Rs837.
Considering a minimal upside from the current market
price, we put a Hold recommendation on the stock from
Buy earlier.
Bajaj Auto—Minimal risk from deficient monsoons
Bajaj Auto has a very small presence in the rural areas,
in the form of three wheelers and the motorcycle
segment below 125cc. The company has 9.5% market
share in the motorcycles segment below 125 cc (as
against Hero Honda's market share of 83%) and the
three wheeler sales is mostly linked to the commercial
transportation in the rural and the semi urban areas.
The company is recently concentrating more on the
higher end bikes, which fulfills the demand in the urban
areas and the new launches in the three wheeler segment
slated to be in the end of FY2010 will drive most of the
growth for Bajaj Auto, thereby suppressing any risk from
the below normal monsoons.
We maintain our Hold recommendation on the stock
with a price target of Rs1,290.
Hero Honda—Highest rural exposure may hurt volumes
Hero Honda has the maximum penetration in the rural
areas, with ~45% of the sales coming from the rural
areas.
Most of the volumes in the rural areas come from the
100cc-125cc segment, where Hero Honda has a market
share of 83%.
Thus though the company reported a 26.5% YTD growth
as against the industry growth of 15.8% in the domestic
market, we believe that hero Honda's performance is
the most susceptible to lower rural incomes due to a
bad monsoon.
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