Are Maruti, Tata Motors and M&M good bets post their Q3 earnings?

Most analysts expect slowdown in the auto industry to continue due to lack of pick-up in rural demand on account of liquidity crisis in NBFC and higher monsoon deficit in select regions.

December quarter earnings and January sales figures paint a grim picture for most auto companies in India. While Tata Motors scripted history by reporting biggest-ever quarterly loss of India Inc at around Rs 27,000 crore, Maruti Suzuki India (MSIL) posted decline in its net profit for the second straight quarter. Mahindra & Mahindra, too, delivered a muted performance during the period.

As regards sales, the overall volume for the auto industry declined 5 per cent year-on-year YoY (+25 per cent month-on-month basis) to 20,19,331 units in January 2019 due to lower demand across segment and inventory destocking by few players, suggests SIAM (Society of Indian Automobile Manufacturers) data. Domestic passenger vehicles (PVs) sales during this period fell 2 per cent (YoY).

At the bourses, shares of Maruti Suzuki India, Tata Motors and Mahindra & Mahindra, have fallen 21.5 per cent, 59 per cent and 13.13 per cent, respectively in the last one year. (as of Tuesday's close). In comparison, the benchmark Nifty50 index has risen nearly 3 per cent while the Nifty Auto index has fallen 27 per cent during the same period. 

Company Name	Date	Closing price as on Feb 12, 2019	Date	Closing price as on Feb 12, 2018	% change
Tata Motors Ltd.	12-Feb-2019	151.45	12-Feb-2018	372.45	-59.34
Maruti Suzuki India Ltd.	12-Feb-2019	7145.10	12-Feb-2018	9106.10	-21.54
Mahindra & Mahindra Ltd.	12-Feb-2019	648.60	12-Feb-2018	746.70	-13.14

NIFTY 50	12-Feb-2019	10831.40	12-Feb-2018	10539.75	2.8
NIFTY AUTO	12-Feb-2019	8278.10	12-Feb-2018	11364.75	-27.2

Data Source: ACE Equity

The road ahead

Going ahead, most analysts expect slowdown in the auto industry to continue due to lack of pick-up in rural demand on account of liquidity crisis in NBFC (non-bank finance companies) and higher monsoon deficit in select regions. Moreover, Budget proposals such as farm package and increase in tax exemption limit, will also take time to show any substantial change in the volumes growth, they say.

“Given the modest amounts involved and time taken to realise the tax benefits, we don’t expect any material change to our volume growth expectations for passenger vehicles. We are currently building in 9 per cent volume growth for PVs and two-wheelers in FY20F,” said analysts at Nomura in a recent report.

However, some analysts are hopeful and suggest investors can look at this segment, albeit from a medium-to-long term perspective. That said, they too rule out a sales and stock price pick-up in the immediate term for most players.

Motilal Oswal Financial, for instance, feels PV demand is being deferred and suggest a correction in fuel prices, resolution of liquidity issues and upcoming new product launches are likely to drive a recovery in PV demand over the next few months.

"We continue to remain constructive on domestic PV industry growth prospects given its low penetration compared to other major economies and higher per capita income. Further, macro headwinds (crude, currency and commodity) which affected the industry, have eased from the high, which in turn, is positive for the industry," wrote Rohit Khatri, research analyst at Religare Securities in a note dated January 30, 2019.

Maruti Suzuki India

Maruti remains the top pick of Nomura and Motilal Oswal Securities in the auto sector, especially the PV segment. Analysts at Motilal Oswal say the operating performance has bottomed out in the third quarter of financial year 2018 – 19 (Q3FY19), and expect a gradual recovery from 4QFY19. They expect long-term earnings before interest, taxes, depreciation and amortisation (EBITDA) margin to sustain in 13-15 per cent range, mainly driven by a further improvement in the product mix, reduction in discounts and reducing royalty with increasing contribution of India to R&D.  

"We value MSIL at 23x Mar’21E core EPS, based on a two-stage dividend discount model. The stock trades at 23.9x/19.7x FY20E/21E EPS," they said. The brokerage has maintained 'Buy' rating with a target price of Rs 8,131.

Slowing pace of economic growth, rising competition in the PV segment and subdued consumer sentiment are three key factors due to which Mahesh Bendre, analyst at Karvy Stock Broking, has a 'sell' call on the stock with the target price of Rs 6,393. Bendre believes achieving double-digit volume growth is likely to be challenging for the next two quarters.

Tata Motors

After reporting India Inc’s biggest quarterly loss of nearly Rs 27,000 in the December 2018 quarter, most analysts have trimmed growth targets for Tata Motors and see no near-term trigger for the stock. Maintaining a neutral stance on the counter with the target price of Rs 165, IDFC Securities says with strong headwinds (diesel sentiment, Brexit, trade wars) affecting sales/margins, JLR may now focus on cutting costs/capex to improve free cash-flows/profitability.

Analysts at CLSA, too, maintain a ‘sell’ rating on the stock with a target price of Rs 150. “JLR’s margin declined quarter-on-quarter (QoQ) despite higher volume. Big asset impairment dragged Tata Motors into consolidate loss. The demand outlook has worsened in China and India. Cut FY19-21 EPS Estimate by 2-66 per cent. The stock will remain weak given insufficient near-term triggers,” they said in a recent report.

Mahindra & Mahindra

M&M remains a key beneficiary of the government's increased focus on rural India that accounts for nearly 70 per cent of core volumes for the company, say analysts at Elara Capital. “We believe M&M’s utility vehicle (UV) volume is likely to accelerate with the recent launches and upcoming XUV 300 in Q4FY19. We are impressed with the LCV, M&HCV, three-wheeler and export segments, which have pulled up the YTDFY19 total automotive volume growth to 13 per cent,” they said. The brokerage has 'buy' rating on the stock, but has revised the target price lower to Rs 893 from Rs 988 earlier.

As regards XUV 300, analysts at Reliance Securities suggest that incremental volumes of the XUV and Marazzo would compensate for likely slowdown in tractor segment going forward. The brokerage has 'buy' recommendation on the stock with a revised SOTP-based target price of Rs 835.