MONTHLY UPDATE

Batlivala & Karani

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19 August 2009 Auto Ancillary Sector
Smooth ride with caution
B&Ks view
With car major Maruti and two-wheeler major Hero Honda achieving record levels of
production, the auto ancillaries supplying components to these companies like Omax
Auto, Rico Auto, Sona Koyo and Subros are witnessing uptrend in volumes.
The replacement demand for auto ancillaries is in tact. Though there is sequential
improvement in demand from CV segment, it is still below the peak levels achieved.
As per our interaction with auto ancillary companies, so far there is no downward
revision of schedule from auto majors due to monsoon failure. However, more clarity
on this front will emerge only by December, after the festival season.
On the export front, car segment in Europe and US is showing signs of sequential
improvement due to incentive schemes announced by European and US governments.
We expect the inventory levels to come down due to this improvement in sales. Overall,
the demand from overseas market continues to be under pressure, as the CV sector is
yet to witness revival.
After bottoming out, the commodity prices have started moving up. Due to raw material
price increase, we expect margins of battery and tyre companies to be under pressure
in the current quarter compared to the last quarter.
At the current valuations, our top picks in the auto ancillary space are Subros, Amara
Raja Batteries and Balkrishna Industries Limited.
Domestic OEM demand
Demand from passenger vehicle OEMs improved 13.5% YoY in July 2009. Demand from
Maruti improved 29.4% while demand from Tata Motors also witnessed a marginal
improvement of 0.7%. However, demand from Hyundai fell 12.6% owing to the labour
unrest at its facility in Chennai.
Share Data
(%) Absolute price performance
1M 3M 12M
Sensex 2.0 5.3 2.7
B&K Auto Ancillary Universe
ABC Bearings 41.4 43.3 (28.2)
Amara Raja Batteries 18.4 98.7 17.8
Apollo Tyres 11.3 37.8 12.9
Asahi India Glass 6.1 17.7 (7.1)
Automotive Axles 62.6 90.1 (27.4)
Balkrishna Industries 13.5 50.2 (26.0)
Bharat Forge 54.4 29.4 (12.8)
Ceat 10.2 114.0 70.5
Clutch Auto 6.1 40.7 (24.1)
Denso India 25.3 53.9 2.5
Dynamatic Tech. 24.9 65.8 (3.4)
Exide Industries 7.1 49.7 17.6
FAG Bearings India 1.5 47.2 15.3
JK Tyers and Ind. 2.7 44.1 (0.3)
LG Balakrishnan 11.0 5.8 (12.5)
MM Forgings 7.8 20.0 (37.3)
Motherson Sumi 0.1 (5.3) (0.9)
Bosch 13.6 25.5 3.7
MRF 24.4 63.1 18.4
NRB Bearings 5.5 32.3 (32.5)
Omax Autos 29.2 49.0 (1.1)
Pricol 5.7 24.7 (32.7)
Rico Auto Industries 55.6 90.3 52.9
SKF India 3.8 39.7 14.8
Sona Koyo Steering 23.7 31.9 (18.8)
Subros 28.4 56.3 3.6
Suprajit Engineering 46.9 88.7 21.3
Sundram Fasteners 31.2 51.2 30.5
Tube Investments 1.8 78.0 14.9
PV production and growth
Source: SIAM
Demand from two-wheeler OEMs improved 14.5% YoY in July 2009. Demand from
Hero Honda and HMSI continues to be robust at 22.7% and 26.1% while demand from
TVS Motor grew 13.1%. Baja Auto reported negative growth of 7.0%.
AUTO ANCILLARY SECTOR 2
B&K RESEARCH AUGUST 2009
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Production Growth
Two-wheeler production and growth
Source: SIAM
The LCV segment saw a growth of 7.2% YoY. However, demand from MHCV dropped
15.5%. Overall, the CV segment reported a negative growth of 3.3 %.
Overseas demand
Export markets, mainly Europe and US continue to witness pressure. Demand for light trucks
and medium & heavy trucks declined 21.0% and 38.4% YoY. Demand from car OEMs also
saw a sharp fall of 48.1%.
US Auto production
Month Year-to-Date
July July Volume January-July Volume
2009 2008 (%) Chg. 2009 2008 (%) Chg.
U.S. Car 147,473 284,028 (48.1) 1,031,031 2,258,869 (54.4)
U.S. Light Truck 215,606 272,984 (21.0) 1,592,213 3,063,357 (48.0)
Total Light Vehicle 363,079 557,012 (34.8) 2,623,244 5,322,226 (50.7)
U.S. Med./Hvy. Truck 9,414 15,292 (38.4) 75,921 141,445 (46.3)
Total U.S. Vehicle 372,493 572,304 (34.9) 2,699,165 5,463,671 (50.6)
Source: Wardsauto
LCV production and growth
Source: SIAM
MHCV production and growth
AUTO ANCILLARY SECTOR 3
B&K RESEARCH AUGUST 2009
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Domes tic RSS 4 Intl RSS 3
Impact of raw material
Lead
From US$ 1,000/tonne in January 2009, lead price has now moved up to ~US$ 1,800-
1,900/tonne. Considering the current stable prices in automotive replacement market, we
expect the margins to be under pressure in the current quarter for battery companies like
Exide and Amara Raja batteries compared to last quarter in which they reported record
profits.
Source: London Metal Exchange
Natural rubber
The natural rubber price in the domestic market has moved up from Rs 65 to Rs 101 and in
the international market from Rs 62 to Rs 98. We expect the margins for tyre companies to be
under pressure in the current quarter compared to the last quarter, in which tyre companies
reported record margins. The margin impact will depend on the price at which NR is contracted
by the individual companies locally/internationally.
NR price
Source: Rubber Board
Lead price
AUTO ANCILLARY SECTOR 4
B&K RESEARCH AUGUST 2009
Valuation matrix
(Rs mn) S/C Reco Price (Rs) Revenue (Rs mn) EPS (Rs) P/E (x)
18 Aug 09 FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E
ABC Bearings S BUY 54 1,338 1,436 1,569 6.3 12.5 13.3 8.6 4.4 4.1
Amara Raja Batteries S BUY 115 13,177 13,159 14,857 9.4 16.0 16.9 12.3 7.2 6.8
Apollo Tyres C OP 40 49,841 54,265 59,796 2.8 4.0 4.6 14.3 10.0 8.7
Asahi India Glass S SELL 54 12,182 13,816 15,617 (0.1) (2.4) 0.1 NA NA 535.5
Automotive Axle S UR 205 2,470 2,868 3,143 3.0 8.3 9.3 68.5 24.7 22.1
Balkrishna Industries C BUY 298 14,071 14,143 15,065 38.6 67.6 72.1 7.7 4.4 4.1
Bharat Forge C UP 230 47,740 38,644 43,124 2.6 2.2 5.2 88.3 104.4 44.2
Bosch S OP 3,864 46,202 48,304 53,434 197.8 180.7 204.9 19.5 21.4 18.9
Ceat S NR 133 25,560 27,229 29,709 (4.7) 38.1 37.8 NA 3.5 3.5
Clutch Auto S UP 30 1,960 2,091 2,251 3.0 2.9 4.4 9.9 10.2 6.7
Denso India S OP 67 5,307 5,985 6,563 6.5 9.8 11.1 10.3 6.8 6.0
Dynamatic Technologies C OP 1142 4,056 4,180 4,859 (3.1) 37.4 59.3 NA 30.5 19.3
Exide Industries S BUY 84 33,930 38,024 41,900 3.6 4.8 5.4 21.2 15.9 14.1
FAG Bearing S BUY 445 7,444 8,023 8,884 60.2 58.2 73.5 7.4 7.6 6.1
JK Tyres* S OP 93 49,221 35,157 37,786 3.1 14.1 15.2 29.9 6.6 6.1
LG. Balakrishnan S OP 14 5,076 5,363 5,913 1.1 1.7 2.1 12.4 8.0 6.5
MM Forgings S OP 54 2,068 1,556 1,709 8.8 4.1 8.1 6.2 13.2 6.7
Motherson Sumi**** C OP 78 25,956 62,810 70,375 5.0 5.3 6.2 15.6 14.7 12.6
MRF S OP 4,218 55,876 62,588 594.4 635.3 7.1 6.6
NRB Bearings S UP 47 2,907 3,187 3,450 0.9 4.6 5.2 52.6 10.3 9.1
Omax S OP 40 8,121 9,136 10,324 2.5 4.5 6.0 15.8 8.8 6.6
Pricol S UP 11 6,163 6,703 7,399 (3.3) 0.2 0.9 NA 55.3 12.3
Rico Auto C OP 27 9,197 10,567 12,103 (0.4) 1.1 2.1 (66.3) 24.1 12.6
SKF India S OP 263 16,202 15,663 17,273 24.2 18.2 24.2 10.9 14.5 10.9
Sona Koyo Steering S UP 12 6,932 7,765 8,717 (1.6) (0.3) 0.1 NA NA 120.1
Subros Limited S BUY 32 6,958 8,287 9,184 2.2 3.5 5.1 14.5 9.1 6.2
Sundram Fasteners S BUY 35 12,622 12,919 14,127 0.8 3.3 3.5 43.6 10.6 10.0
Suprajit Engineering C OP 83 2,046 2,212 2,433 7.5 10.0 11.2 11.0 8.3 7.4
Tube Investments S OP 57 20,752 22,087 24,229 1.4 4.1 4.7 35.8 12.2 10.6
*JK Tyres has changed its accounting period, the FY09E numbers are for the eighteen-month period from 01 October 2007 to 31 March 2009.
**After considering the insurance business valuation
***After considering the insurance business and investments valuation
****Visiocorp numbers included from FY10E onwards
Note: S Standalone, C Consolidated, UP Underperformer, OP Outperformer, NR Not Rated, UR Under Review.
AUTO ANCILLARY SECTOR 5
B&K RESEARCH AUGUST 2009
Annamalai Jayaraj Shweta Mungre Alarmelumangai S
annamalai.jayaraj@bksec.com shweta.mungre@bksec.com alamelumangai.s@bksec.com
+91-44-2846 6940 +91-120-460 5620 +91-44-2846 6918
Analysts Declaration: We, Annamalai Jayaraj, Shweta Mungre & Alarmelumangai S, hereby certify that the views expressed in this report accurately reflect
our personal views about the subject securities and issuers. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related
to the specific recommendation or view expressed in this report.
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B&K Investment Ratings:
1. BUY: Potential upside of > +25% (absolute returns)
2. OUTPERFORMER: 0 to +25%
3. UNDERPERFORMER: 0 to -25%
4. SELL: Potential downside of < -25% (absolute returns)
B&K RESEARCH AUGUST 2009