Religare Securities Views on Larggecap Autos - Hero Honda, Maruti Suzuki

Hero Honda

With two launches already made in first half FY09 and three more variant launches scheduled to occur in the second half, Hero Honda is likely to maintain its market dominance in the two wheeler industry. The company has registered a 27% growth to 305,516 vehicles till date this fiscal and has gained market share in all segments, despite higher interest rate and consequent higher equated monthly installment (EMI) for a retail customer taking a bank loan to purchase a bike. Hero Honda has also announced price hikes across all segments in motorcycles, which consequently has led to a boost in its margin. We expect the company to report a revenue growth of 19% during FY09, aided by volume growth and improvement in realisation per vehicle. The company's move to step up its capacity utilization at its Hardwara, where excise and tax benefits will help improve operating margins going forward as compared to its competitors who would be under margin pressure.

MARUTI SUZUKI

Maruti Suzuki is set to grow on the back of strong performance of its new launches viz. Dzire, SX4 and Swift Diesel. The launch of the A-Star and Splash should further help the volume and will improve price realization. The company's product mix is increasingly getting richer with growth seen in models with higher realizations. The scaling up of the Manesar plant should complete in the third quarter of FY09 and address the concerns on capacity constraints of the more successful models. Exports should be the key driver, with manufacturing agreements with Nissan and Suzuki helping to maintain high capacity utilisation for the recent expansion. We expect exports to grow at a compounded annual growth rate of 90% over FY08-FY10E. The sixth pay panel would be a key driver, as more government employees are likely to buy cars with salary arrears that they would get, we consider this as a near term trigger to sales growth.