Automobiles Sales Gather Momentum

The sales volume figures for the month of July 2012 were announced on August 1, 2012 by Maruti Suzuki India Limited (MSIL), Tata Motors and Mahindra & Mahindra (M&M), the top three listed automobile manufacturers. These figures have shown an overall improvement in the automobile sector since the three companies together contribute to most of the market share in the sector.

The automobile sector started slowing down from the beginning of FY12 and this slowdown further increased in gravity from the beginning of FY13. Since then, all the auto makers have been either witnessing sluggish growth or de-growth. Trends in the industry have been rapidly changing with increased shift of sales to diesel cars on account of the fuel being cheaper, increased growth in sales of utility vehicles, higher growth in the sales of light commercial vehicles (LCVs) and double-digit de-growth in the sales of medium and heavy commercial vehicles (M&HCVs). Due to these drastic changes in the industry, companies that were positioned appropriately to capture this movement have gained. 

*On account of a lower base in the previous year due to strikes

The bounce-back in growth can be seen through the YoY monthly sales growth figures from the beginning of FY13. MSIL witnessed growth in the range of -5 per cent and 3.4 per cent while Tata Motors grew in the range of -6.67 per cent and 3.61 per cent. This has seen a sudden change with MSIL and Tata Motors announcing July 2012 growth figures to be 9.21 per cent and 14.97 per cent, over July 2011, respectively. 

Looking at the three companies individually, MSIL saw tremendous growth coming in from the sales of utility vehicles, which has been the case since the launch of Ertiga. July 2012 also saw compact passenger cars (Swift, Ritz and Estilo) grow by 73.20 per cent over July 2011. The sales of Dzire too defined the model’s success after having sold 11,413 cars in July 2012 over 3,021 in July 2011. De-growth was seen in the sales of mini cars (800, A-Star, Alto, Wagon R), SX4, Kizashi and vans. Exports too rose by a robust 27.44 per cent, reaching 11,210 units. The effect of the Manesar plant lockdown will be seen in the sales figures of August 2012 with inventories of MSIL exhausting rapidly and with no change in the production status.

The sales for Tata Motors saw some strength after all its models in the passenger vehicles segment grew immensely in the range of 40 per cent and 68 per cent, landing the overall passenger vehicle sales higher by 52.63 per cent. In commercial vehicles, Tata Motors has been seeing the same trend as earlier, with high growth in LCV sales and negative double-digit growth of around 20 per cent level in M&HCV sales. Unlike MSIL, there was a decline seen on the exports front for Tata Motors, with July 2012 exports at 5,532 compared to 6,512 in July 2011, a de-growth of 15.05 per cent. Overall, the total sales increased to 74,159 in July 2012 versus 64,502 in July 2011, growing by 14.97 per cent.

M&M has captured the Indian utility vehicle growth story completely with the launch of XUV500. Its growth in passenger vehicles remained strong in July 2012 at 27.14 per cent YoY though there has been a decline in the sales of Verito, M&M's only brand in passenger cars. The company has launched a new model of the same car with sales expected to boost with the approach of the festive season. As with other companies, M&HCV sales saw a decline for M&M as well, with a YoY de-growth of 16.87 per cent, although the company has a smaller base. Overall, the company’s sales saw a growth of 18.74 per cent, with July 2012 sales reaching 47,059 as compared to 39,633 in July 2011.

The trailing PE of these companies suggests a relatively undervalued stock for M&M with a PE of 14.28x. Compared to this, MSIL and Tata Motors are currently trading at PEs of 21.48x and 57.99x respectively. Moreover, since the beginning of this financial year, MSIL and Tata Motors have both seen capital depreciation to the extent of more than 17 per cent each. On the stocks of M&M though, returns from the beginning of the financial year till now have been 0.17 per cent. The growth presented by M&M in the last few months has been way higher than the overall sales growth figures of the Indian automobile industry.  While we have recommended investors to avoid investing in MSIL till there is news on positive developments in Manesar, we have a positive outlook on M&M, thus recommending a ‘buy’.