Not yet there

Not yet there

Ram Prasad Sahu / Mumbai March 16, 2009, 0:21 IST

Robust numbers in key sectors over the last two-three months do not indicate a revival in demand.

In an environment of slow GDP growth, industrial production and cutback in investments, volume growth across a few core sectors such as steel, auto, cement and capital goods has come as a pleasant surprise. Analysts, who had written off the manufacturing sector due to the dramatic dip in demand across sectors in the quarter ended December 2008, have hit the pause button to ascertain whether the spike in volumes is one-off or the start of an upward trend. What is intriguing is that despite demand contraction in IIP numbers for two consecutive months of December (0.6 per cent) and January (0.5 per cent), sentiment in sectors such as auto (up 13 per cent y-o-y), steel (higher production estimates in current quarter) and cement (higher dispatches between November to February period) has shown some buoyancy.

 

While many of the worries including high raw material costs, high interest rates and credit availability are easing, there is still a question mark over the biggest factor of them all--consumer demand. Analysts say that the current upsurge in auto, cement and steel volumes might not be sustained unless there is an appreciable improvement in consumption, which in the current job scenario looks difficult.

Our analysis of the auto, cement, steel and realty segment numbers for the last two months indicates that increased demand is a combination of factors that include higher government spending, infrastructure investments, price reductions (due to excise duty cuts), new product launches and pent up demand. While these sectors (except cement) will see a year-on-year decline in volumes in FY09, a recovery, it is believed is likely to occur only towards the end of the third quarter of FY10. Read on to know more about the sectors that has hit sales highs recently.

AUTO
For a sector that has been plagued by credit issues, a sluggish economy and high interest costs for a major part of the current fiscal, the start of the fourth quarter has come as a welcome surprise. Sales across categories have seen appreciable jumps over the last two months in key categories with February recording a 13 per cent y-o-y growth to 8.36 lakh units. Analysts however, say that the double digit sequential growth rates achieved are unlikely to be sustained with future growth across segments trending between negative to low single digits. While excise duty cuts and lower raw material prices will start reflecting in operating margins from Q4FY09, it is likely to be offset by lower volumes and price discounts. While commercial vehicles (CVs) will continue to face pressure, passenger vehicles and two wheelers are likely to fare better in FY10.

Two wheelers
The least affected segment in the auto sector, two wheeler sales surged 16 per cent y-o-y to 6.3 lakh units in February. While the ongoing turmoil in the economy and concomitant credit and raw material costs have impacted this segment as well, strong rural demand and easing credit situation has helped it to maintain good volumes. The improvement in sales has been led by Hero Honda, which has seen its volumes grow 24 per cent y-o-y on the back of higher sales of Passion Pro. Bajaj Auto however, saw its sales dip 16 per cent on lower exports. TVS Motors saw a 7 per cent jump in its motorcycle sales, while its scooter sales were up 35 per cent y-o-y on the launch of Streak. Going ahead, while product upgrades and the launch of the XCD 135 (sales of nearly 21,000 units in February) should translate into higher volumes over the next few months for Bajaj, for market leader Hero Honda, the growth parameters continue to be its rural reach and higher proportions of cash sales vis-à-vis competition. Though Hero Honda is best placed among two wheeler makers it is expensive at current price levels, while investments can be looked at in Bajaj Auto.

Passenger vehicles
The passenger vehicle segment has shown good growth in February recording a y-o-y growth of 15 per cent. While a low base, a result of people putting off purchases due to the budget, has helped, price discounts and launch of new models (A-Star and I-20) have also aided demand. Going ahead, this segment is likely to see a low- to mid- single digit growth (estimated FY09 sales y-o-y sales of about 3 per cent) on the back of reduced interest rates, willingness of public sector banks to lend, fuel price cut, new launches, discounts and the salary hikes for government employees. The single biggest negative for passenger cars is the cut in discretionary spending due to the uncertain employment scenario.

The beneficiary in the surge in sales over the last couple of months has been Maruti Suzuki, which saw its sales move up nearly 20 per cent y-o-y in the domestic market aided by a 14 per cent jump in sales of its A2 segment, Alto, Zen, Wagon R and Swift. Including exports (A-star), the company posted sales of just under 80,000 units, its highest ever. Unlike its other models, which Maruti is pushing through discounts, the company is likely to maintain its prices for A-Star, Swift and D-zire due to a waiting period of 2-6 months. Like Maruti, M&M too benefited from the launch of Xylo helping its utility vehicle (UV) sales move up by 17 per cent. Though Maruti’s prospects look good, the current valuations (15.5 times its diluted estimated EPS of Rs 46 for FY10) above its historical forward P/E of 14x make the stock expensive.

Commercial vehicles
Excise duty cuts and accelerated depreciation benefits helped both Tata Motors and Ashok Leyland record sequential gains in the M&HCV segment to the extent of 53 per cent and 23 per cent, respectively in February. While this is a significant improvement in the bleak picture between the September and December period (50-70 per cent decline), the forecast over the next few quarters continues to be grim. The sector, which runs lock-in-step with economic growth, is likely to record a 20 per cent de-growth y-o-y in FY09 to about 4 lakh units on the back of poor industrial production activity, drop in demand, high interest rates and operating costs. While truck sales are likely to be muted, growth is likely to come from bus segment, which currently constitutes less than 10 per cent of the M&HV sales. An estimated 15,000 buses are likely to be ordered by various state transport corporations by June and a quarter of that by the defence department. At about Rs 30 lakh each, the total orders from the bus segment is likely to be upwards of about Rs 4,500 crore from the state governments alone, which will help the two listed players. Unlike Ashok Leyland, which will end the fiscal with an 18-25 per cent y-o-y decline, volumes from Tata Motors’ portfolio of LCVs (9 per cent growth for FY09) and passenger cars (flat to 2 per cent growth) will limit the damage. While the dip in the high margin truck sales is a major concern for Tata Motors, the bigger headache is the repayment of bridge loan of $2 billion by June 2009 and short term loans, which will keep the finances under pressure in FY10.

CEMENT
There has been positive news flow for cement companies in the last few months, including higher monthly dispatches (steady at over 16 million tonnes), increase in cement prices and importantly, a visible decline in costs.

The higher dispatches in the past four months, believe analysts, is due to increased spending towards public welfare projects across states in the run up to elections. This is over and above the steady demand from infrastructure segment and from tier-2 and 3 towns. All these have helped offset the demand slowdown in the residential sector (accounts for nearly half of consumption).
 

SECTOR LEADERS
in Rs crore	Trailing 12 months ended December 2008
	Net sales	% y-o-y chg	Net profit	% y-o-y chg	Price (Rs)	Market Cap	PE (x)
ACC #	7,347	15.4	1,136	-1.8	562	10,551	9.0
Ambuja Cement #	3,904	28.1	1,077	101.7	69	10,506	9.4
Bajaj Auto ^	8,841	NA	764	NA	520	7,525	9.9
DLF*	2,778	-29.1	1,518	-22.2	153	25,975	12.0
Grasim #	18,221	10.9	2,730	-9.9	1,493	13,690	7.7
Hero Honda	11,696	14.9	1,178	36.3	961	19,198	16.3
JSW #	14,916	43.8	1,136	-33.5	181	3,391	3.0
M&M	12,099	9.0	548	-44.3	345	8,915	16.3
Maruti Suzuki	18,905	7.5	1,273	-32.3	712	20,581	16.2
SAIL	45,667	23.0	6,861	-2.9	82	33,828	4.9
Shree Cements	2,559	40.2