Auto stocks crack, but few show signs of humming

Most automobile stocks witnessed unwinding today, with Tata Motors Ltd slipping nearly 10 per cent in intra-day trades. The BSE Auto Index was among the top sectoral losers, skidding three per cent, compared with a 0.5 per cent fall in the BSE’s benchmark Sensex.

It was a double whammy for Tata Motors, the top loser in this pack. While on the one hand the company said sales for Jaguar Land Rover (JLR), its UK unit that accounts for a majority of the company’s profits, had slowed significantly over the past quarter, research firm UBS cut the company’s FY13 and FY14 earnings-per-share (EPS) estimates six per cent after this announcement.

UBS maintained its ‘sell’ rating after the company’s announcement on yesterday, citing "expensive" valuations, though the investment bank raised its price target to Rs 255 from Rs 250 as it rolled forward the target six months.

“Ebitda profit is likely to be in the region of levels reported for the previous two quarters and the Ebitda margin is likely to be slightly lower than in the previous two quarters, reflecting less favourable exchange rates, the ongoing effect of a higher mix of Evoque sales and other factors," Tata Motors said.

Adding: “Free cash flow (cash from operations after capital spending) will be negative in the quarter ended December 31 (reflecting working capital calendarisation effects); free cash flow will be positive in the first nine months of the financial year to date.

“Given adverse currency movement and a weak product mix (led by Evoque) are the main factors driving down margins, the pain may spill to FY14. Benefits of a ramp-up in Range Rover may be negated by adverse currency, raised incentives, and lower margins on RR Sport before the introduction of the new model," said Pramod Kumar of IDFC Institutional Securities.

"We see Ebitda getting cut 7-10 per cent with a higher cut at the PAT (profit after tax) level on increased debt. Increased capex (capital expenditure) for FY14, resulting in negative free cash flow, is a major dampener, considering the poor cash flow generation at stand-alone level. Maintain underperformer rating with a 12-month price target of Rs 238," the report adds.

Bharat Forge (down 3.1 per cent), Mahindra and Mahindra (down 2.2 per cent), Ashok Leyland (down 1.6 per cent), Bajaj Auto (down 1.1 per cent) and Hero MotoCorp (down 0.9 per cent) were some of the other losers in this space in intra-day trades.

The road ahead
Explains Amar Ambani, head of research, IIFL: “Auto numbers (volumes) have been disappointing across segments. There has been a de-growth, be it Bajaj Auto or Hero MotoCorp. Even the tractor volumes have been bad. The saving grace for commercial vehicles was the light commercial vehicle segment. There is intense competition among the players in this segment. So, the entire auto industry is struggling.”

“In such a scenario, the industry is faced with union and labour issues, which was haunting Maruti Suzuki India and now Hero MotoCorp. I don’t expect the margins to improve in the next two– three quarters,” he adds.

Stock strategy
So, what should you do with these stocks?

Says a January 23 note from Aashiesh Agarwaal at Edelweiss Research: “We expect Hero MotoCorp’s Ebitda margin in FY14 to continue to remain under pressure, given the intense competition in the domestic motorcycles. This, with wage revisions, will continue to impact margin. We value the firm at 12x FY14E core EPS of Rs 96, which, with cash/investments, yields an SOTP (sum of the parts) of Rs 1,360 a share and maintain reduce/sector underperformer rating.”

Ambani believes when there is too much pessimism, it is a good time to buy. "The stock needs one positive trigger to bounce back. From that viewpoint, I would buy Tata Motors. However, I am not upbeat on the auto pack. I suggest avoiding two-wheelers.”

Deven Choksey, MD, K R Choksey Securities, is also positive on Tata Motors. "Today's correction in Tata Motors was a knee-jerk reaction to the news on the JLR side. What is important is the new product launch in the next quarter, which can be a game-changer.”

“We expect the launch to push the sales volumes of JLR, helping it gain market share. So, I would suggest a dip in the stock be used as a buying opportunity."

For Bajaj Auto, analysts say the company has a strong pipeline of models, which will be priced at a premium, helping it make higher margins. Also, its export business is strong, with Brazil added to the list. Looking at these factors, in FY13/14, the company is better placed. On M&M, Choksey says: "The stock may stagnate in the near future, unless there are product launches."