Q3FY2007 auto earnings preview
Auto volumes remained robust in Q3FY2007 led by the festive season and strong economic activity. As in the past few quarters, the four-wheeler sector has continued to outpace the growth witnessed in two-wheelers. The growth in the commercial vehicle segment continued unabated in Q3FY2007 and we expect the segment to report a strong growth in Q4FY2007 despite the high base. The passenger car segment sales were quite buoyant with various new models being launched in the period coupled with the incentives offered by all the auto majors. Looking at the heavyweights, Bajaj Auto's sales grew by 22.9% in Q3FY2007, while Hero Honda reported a rise of 12.4% in its motorcycle sales. Maruti's car sales grew by 18.7%, Mahindra & Mahindra's (M&M) overall sales were up by 17.7% and Tata Motors' commercial vehicle sales (including exports) grew by 38%.
The strong volume growth during the quarter with stable raw material prices should lead to a margin expansion on a quarter-on-quarter (q-o-q) basis. However, we expect the margin pressure to continue in the two-wheeler segment due to the intensified competition and various sales promotion activities undertaken by the major players.
We expect Ceat, Apollo Tyres, M&M, Ashok Leyland and Tata Motors to be among the leaders in performance in the sector for Q3FY2007.
STOCK UPDATE
Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs53
Current market price: Rs45
VAT caps growth
December sales highlights
- Ashok Leyland reported good numbers for December with an overall growth of 29.6%. However, the growth was lower on a month-on-month basis.
- The growth was affected by the implementation of the value-added tax (VAT) in Tamil Nadu, as most of the sales from the state got deferred to January 2007. Tamil Nadu contributes around 18% of the company's sales volumes.
- The truck segment continued to witness buoyancy, recording a growth of 43% with sales of 4,418 units in December 2006.
- The bus segment recorded a growth of 6.3% during the month, after recording a consistent decline in the earlier months. The light commercial vehicle sales declined by 76% to 22 units.
- The domestic sales for the month grew by 48% to 5,413 units while the exports declined by 46% in December.
- At the current market price of Rs45.2, the stock discounts its FY2008E earnings by 12x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.7x. We maintain our Buy recommendation on the stock with a price target of Rs53.
VIEWPOINT
Allsec Technologies
All set to grow
Allsec, a Chennai-based business process outsourcing (BPO) company, started operations in mid-2000 with a 100-seat facility. Currently, the company has staff strength of 2,700 employees spread over three delivery centres (two in Chennai and one in Bangalore) with a combined capacity of 2,300 seats. It includes a 600-seat capacity acquired by the take-over of B2K Corporation in December 2005.
The company is largely focused on financial services and insurance industry vertical. Currently, it generates around 80% of its revenues from voice-based processes. However, it has continuously improved the revenue contribution from non-voice based services and hopes to maintain the trend.