Indian automotive industry continued its impressive performance during the month of February ‘11. Despite increase in interest rates and product prices in the last six months, automobile sales remained strong. The dispatches by the manufacturer during the current month were also favourably impacted by anticipation of excise duty hike in the Union budget. This is also reflected in a MoM growth in the industry sales despite lower number of days during the month. 2-wheelers segment reported their highest ever dispatches in a non-festive month with a 23% growth. Passenger vehicles reported subdued growth of ~13% due to decline in exports from the country. Domestic demand for the passenger cars remained strong. Volkswagen and Toyota with their new launches are gradually improving their market share. Commercial vehicle segment reported single digit growth primarily due to high base effect. 3-wheeler and tractor dispatches remained robust during the month.

Two-wheelers: In the 2-wheeler segment, all the players reported strong volume growth of above 20%. Industry dispatches increased by 23% to 1.15mn units. This is the best monthly dispatch figures in a non-festive season month.

Passenger Vehicles: In the passenger vehicle segment, overall growth figure was subdued at 12% due to decline in exports of Maruti Suzuki and Hyundai. However, domestic demand remained strong with new product launches keeping the excitement alive in the market. Amongst the new launches, Toyota, Volkswagen and Ford are doing well. Maruti Suzuki launched their premium sedan ‘Kizashi’ during the month.

Commercial Vehicles: MHCV sales were stable on a sequential basis. In this segment, Ashok Leyland reported 42% growth in domestic truck dispatches. In the LCV segment, Mahindra & Mahindra continued with their strong performance. However market leader Tata Motors’ LCV dispatches for the month were subdued.

We remain convinced about the prospects of the Indian automotive industry and reiterate our positive view on the sector. Our top picks in the sector are Bajaj Auto, Mahindra & Mahindra, Ashok Leyland and TVS Motor.

Hero Honda Motors (HH)

Hero Honda (HH) dispatches for the month of Feb’11 met our expectations. The company dispatched 472k units as against our expectation of 471k units. Dispatches for the month grew by 23.5% YoY. YTDFY11, HH dispatches have grown by 16.8% to 4.9mn units. We expect the company to achieve a volume of 5.4mn and 5.9mn in FY11 and FY12 respectively. We maintain a ‘HOLD’ rating on the stock with a price target of Rs1,699 discounting FY12E earnings 16x.

Bajaj Auto (BJAUT)

Bajaj Auto dispatches for the month of Feb’11 were inline with our estimates. Total dispatches for the month were higher by 22% YoY at 327k units as against our expectation of 324k units. Motorcycle sales were higher by 22% YoY to 287k units. The company is expected to launch a new ‘Discover’ in April ‘11 and a 150cc motorcycle in partnership with KTM in Q1FY12. Three wheeler dispatches continued to be robust with a growth of 18.4% to 40k units.

Exports surged 31.9% YoY to 102k units.

We expect the company to achieve a sales volume of 3.9mn units in FY11 and 4.47mn units in FY12. We expect profitability to be sustained in the 20% range. We maintain a ‘BUY’ recommendation on the stock with a target of Rs1,649 discounting FY12E earnings 16x.

TVS Motor (TVSL)

TVS Motor’s (TVSL) dispatches for the month were on the expected lines with company reporting volumes of 177k units as against our estimates of 175k units. Both domestic and export market witnessed strong growth of ~25%. 3-wheelers touched their highest ever mark and crossed 4k units. Scooter volumes, though up by 49% to 40k units, fell short of our estimates of 44k units. This disappointment by Scooters was neutralised by mopeds which witnessed growth of 23% to 61k units. We expect TVSL to end FY11 with volumes of 2.05mn units. For FY12, we expect volume to move up to 2.28mn units. We maintain a ‘BUY’ rating on the stock with a target price of Rs82 discounting FY12E earnings 14x.

Maruti Suzuki India (MSIL)

Maruti Suzuki (MSIL) dispatches for the month of Feb’11 were inline with our estimates with a growth of 15.5% YoY to 112k units. The A2 segment, which accounts for two thirds of overall sales, was up 19.4% to 72k units. The A3 segment (Dzire, SX4) grew by 27.3% to 13k units. During the month MSIL launched the diesel version of its Sedan SX4. The company also launched the high end sedan Kizashi in the A4 segment. The Kizashi will be imported as a fully built unit. The MPV segment (Omni, Versa) dispatches too were up 6.9% to 13.5k units. Overall domestic dispatches grew by 19.8% to 102k units. Exports have witnessed a declining trend MoM for the last four months. Halting this move, in Feb exports grew by 8.4% MoM to 10k units. We expect MSIL dispatches to reach 1.25mn units in FY11. In FY12, we expect a growth of 14.2% to 1.43mn units. We maintain a ‘HOLD’ recommendation on the stock with a target price of Rs1,368 discounting FY12E earnings 15x.

Mahindra & Mahindra (M&M)

Mahindra & Mahindra (M&M) auto division dispatches were lower than our estimate with lower growth in the passenger UV’s segment. Overall dispatches were higher by 19.7% at
33k units. Passenger UV segment (Scorpio, Xylo, Bolero etc) grew by 11.6% to 14k units as against our expectation of 17k units. The lower dispatches is attributable to lower number of days for production during the month. Pickup and SCV dispatches were higher by 13.2% to 10k units. Logan sales doubled to 1,151 units. Three wheeler dispatches were higher by 57.2% at 6k units. LCV and MHCV dispatches were at 900 units. Auto exports were flat at 1,411 units. The tractor division sales were inline with estimate. Domestic tractor dispatches were higher by 38% at 18k units. Tractor exports were higher by 16.3% at 907 units. We maintain a ‘BUY’ recommendation on the stock with a SOTP based target price of Rs902.

Tata Motors (TTMT)

Tata Motors’ dispatches from Indian operations were in line with our expectations. Domestic commercial vehicle volumes increased by 5% to 41k units. Heavy commercial vehicles dispatches were flat on a high base of last year. LCV segment dispatches increased by % but fell short of our estimates of 15% growth. In the passenger vehicle segment, Nano dispatches doubled to 8.3k units while Indigo reported increase of 22% at 9k units. Dispatches of Indica cars declined by 13% to 10k units. Nano dispatches after nose-diving to 509 units in November 2010 has made a strong rebound in the last three months. UV sales for the month were higher by 16% to 4.6k units Exports during the month grew by 52% to 4.5k units. We do not have a rating on the stock.

Ashok Leyland (AL)

Ashok Leyland dispatches for the month of Feb’11 were significantly ahead of our estimates. We were expecting the company to report dispatches of 8,005 units. However, the actual numbers were 9,800 units reflecting a growth of 25%. Bus volumes during the month were as per our estimates, however truck dispatches increased by 31% to 7,601 units due to demand from truck operators and dealers in anticipation of increase in excise duty. With these figures, we are now more convinced that AL will be able to meet our volume estimates of 92k units for the current year. We reiterate ‘BUY’ rating on the stock with a target price of Rs76.