[Investors Please Listen] Q4FY2009 Auto earnings review

Key points

• The Q4FY2009 results of the automobile sector were mixed, even though the performance improved significantly quarter on quarter. The improvement was led by a better volume growth and easing of margins on the back of softening commodity prices during the fourth quarter. In the quarter, the net sales of the Sharekhan automobile universe improved by 17.3% while the margins remained under pressure, leading to a flattish profit growth of 1%.
• The revenues improved across the two-wheeler and four-wheeler segments with the quarter witnessing a revival of sorts. Easing liquidity condition combined with the positive effect of the recent government measures to boost the economy clearly had a positive impact on the volumes. The excise duty cuts effected by the government in its various stimulus packages were the single most important factor that positively affected the sales of the four-wheeler industry. 
• Though there was a margin respite across the sector, the industry leaders continued to outperform the industry. Maruti Suzuki and Hero Honda Motors outperformed their peers by a long margin in their respective segments while the other players continued to struggle. The medium and heavy commercial vehicle (M&HCV) segment continued to slide during the quarter while the light commercial vehicle (LCV) segment gained some respite.
• With the improvement in the liquidity condition in the economy and the government measures, the sector saw a smart revival in Q4FY2009 after a disastrous Q3FY2009. However, the industry data continues to be mixed with the leaders continuing to gain market share. Even a look at the industry numbers for May 2009 in the passenger car segment tells the same story: Though Maruti Suzuki posted an impressive growth of 11.6% in the domestic market, its peers such as Hyundai Motor India and Tata Motors disappointed with a decline of 4% and 9.8% respectively in the domestic market. A similar trend was noticed in the two-wheeler market, where Hero Honda Motors continued to build on its market share while Bajaj Auto failed to arrest the fall in its market share. In view of the mixed performance, it is difficult to say whether the revival seen in the recent past is temporary and the sector's future performance needs to be watched very carefully. We continue to keep our ears on the ground to pick up further signals. 
• On the valuation front, we find some of the front-line automobile stocks expensive, as these are trading higher than their historic average and at a significant premium to the Sensex. Consequently, we adopt a very cautious approach to the industry, choosing Bajaj Auto and Mahindra and Mahindra (M&M) as our top automobile picks.

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Click here to read report: Sharekhan Special

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