Automobile (Q3 FY10) Sector Review

During Q3 FY10, Indian auto majors reported robust earnings growth on back of strong volume growth across categories. Volume growth was on account of improving consumer sentiment, increased availability of finance and incentives provided by the government under Sixth Pay Commission scheme. Lower raw material costs coupled with benefits of operating leverage translated into above estimated expansion in OPM for majority of the companies. Going ahead, margins are expected to be under pressure on back of rising raw material prices, intensifying competition and costs of implementation of new emission norms. Major headwinds for the industry are roll back of excise benefits and higher interest rates. Nevertheless volume growth for the industry is likely to stabilize going forward driven by increasing penetration levels, easy availability of finance and strong economic growth. Under such a scenario, our top picks include Bajaj Auto (gaining market share), Hero Honda (robust growth from rural areas) and Maruti (surging demand of small cars).