Volume growth may trigger earnings upgrades in auto stocks
Maruti Suzuki has emerged as the top pick among four-wheeler manufacturers while TVS Motor Company leads the two-wheeler pack.
“Higher-than-expected volume growth in June would certainly bring in a positive bias for analysts to revise their volume assumption upwards for 2014-15 and 2015-16,” said Basudeb Banerjee of Antique Stock Broking. Stocks of Maruti and TVS Motor are likely to see a higher price-earnings ratio, or P/E multiple, due to higher volume growth, he added.
Brokerage BoAMerrill Lynch in a note said, “Auto sales in June showed continued signs of revival, led by positive sentiment and fears of an excise cut rollback. We expect the demand environment to continue to improve in the coming months due to pentup demand. Maruti Suzuki and Tata Motors are key picks in the sector.”
Analysts have already revised their volume growth assumption for two-wheelers to 10-12% and four-wheelers to 8-10% for the current fiscal, compared with their earlier estimates of 8-10% for two-wheelers and 5-7% for four-wheelers. India’s largest carmaker Maruti Suzuki’s robust wholesale and retail volumes proved to be a key reason for analysts to revise their estimates. Maruti recorded volume growth of 33.5% in June to 1.12 lakh units compared with analysts’ expectations of 1.01 lakh units.
The company’s management had indicated that retail sales had been stronger than wholesale sales at 1.08 lakh units compared with 95,000 in May. Retail sales comprise units sold to customers by the dealers while wholesale volume denotes vehicles sold by the company to its dealers.
“Robust retail sales of vehicles of Maruti show there is a lot of pent-up demand for the passenger vehicle demand in the market. This is the reason why growth in mini segment, comprising key models Alto and Wagan-R, grew at a strong 52% in the last month,” said a fund manager of domestic fund.
The fund manager, who did not wish to be identified, added, “On the basis of volume growth in the first quarter, Maruti’s stock will now start discounting volume growth of 10% for 2014-15 and 15% for the next fiscal. This means more earnings upgrade will continue for Maruti and it remains the top pick to play automobile volume growth in India.” According to Motilal Oswal, Maruti is likely to record a volume growth of 16% in the current fiscal and 17% in 2015-16.