After a breather in the previous month, Indian automobile industry rebounded in December `10. The retail sales of some of the leading manufacturers were significantly ahead of dispatches and this reflects demand buoyancy for the sector. With high retail sales, automobile industry is moving into the year 2011 with low pipeline inventory and this augurs very well for the manufacturers. During the month, except for passenger cars, all other segments reported sequential growth. Passenger car dispatches were adversely impacted by annual maintenance shutdown taken by market leader Maruti Suzuki. Medium & Heavy commercial vehicles (MHCV) after the emission norms induced lull of last two months, reported sharp recovery. In the LCV segment, market leader Tata Motors reported their best ever volumes with continued success of `Ace'. In the 2-wheelers segment, market leader Hero Honda increased its dispatches to benefit from the impending marriage season demand.

Two-wheelers: Industry dispatches increased by ~29% to 1.13mn units and YTD industry figures are close to breach the 10mn mark. All the major players barring Bajaj Auto reported strong volume growth during the month.

Passenger Vehicles: Despite maintenance shutdown, Maruti reported strong double digit growth. Tata Motors seems to be putting `Nano' back on track with new customer focussed initiatives. Maruti reported retail sales of 138k units in domestic market which is significantly higher than domestic dispatches of 89k units during the month.

Commercial Vehicles: MHCV sales rebounded strongly with 30% sequential growth. We expect this trend to continue due to robust underlying economic growth. LCVs riding on need of last mile connectivity maintained their consistent performance.

Our Viewpoint

Despite headwinds due to increase in commodity prices, interest rates and fuel prices, we expect automobile industry to achieve double digit growth owing to strong economic growth. We remain positive on the sector. Our top picks in the sector are Bajaj Auto, Mahindra & Mahindra, TVS Motor and Ashok Leyland.