The tide is turning
3QFY09 has seen the trough in earnings
We believe the Indian auto industry saw the trough in earnings in
3QFY09. Starting 4QFY09, we expect earnings will improve
sequentially, the first leg (next 2-3 quarters) driven primarily by
sequential margin improvement on lower commodity prices. Most
supplier contracts (largely six-month contracts) are likely to come up for
re-negotiations in early 2009. While auto companies will realize some
benefit in 4QFY09, the full benefit will be realized from 1QFY10. The
second leg of earnings growth (starting 2HFY10) will be driven by
volume improvement and the resulting operational leverage.
Near-term volumes to remain patchy; recovery imminent
We see the outlook for autos (ex-CVs) improving with macro factors
turning conducive (lower interest rates, fuel price cuts, and excise rate
cuts). However, we believe that the near-term volumes will remain
patchy and expect steady and sustainable volume growth starting
2HFY10. Although underlying demand drivers (income levels, lower
prices due to lower excise duty, significant scope for penetration of
autos) are intact, facilitators such as consumer sentiment, interest rates
and availability of loans are absent. We expect demand will rise as the
measures instituted by the Reserve Bank of India (RBI), namely interest
rate cuts and higher liquidity trickle down to end consumers, and
consumer sentiment improves. However, we remain negative on CVs as
we believe that the existing truck fleet is far ahead of freight demand.
Stick with strong franchises; BUY at the right price
We have rated companies under our coverage on the strength of their
franchise using parameters such as ability to protect market share,
expansion of distribution networks, investment in new product
platforms/launches and financial strength. While the timing of the
turnaround in the industry is debatable, we believe a turnaround is
imminent. We prefer companies with strong franchises. We would BUY
M&M and Exide at current prices. Maruti and Hero Honda, we believe,
are fully priced and should be bought at lower levels. Maintain REDUCE
on Tata Motors and Bajaj Auto.

Contents
See sequential earnings improvement in 4Q09............................................................. 3
3QFY09 has seen the trough in earnings 3
Margins will drive the first leg of earnings improvement 3
Near-term volumes to remain patchy; but recovery imminent ....................................... 5
Demand drivers in place 5
“Facilitators” missing now; should return by 2HFY10 6
Expect a medium-term (3-5 year) CAGR of 11-12% 6
Continue to remain negative on commercial vehicles 7
Our estimates for our coverage universe 8
BUY strong franchises................................................................................................... 9
How do we define ‘strong franchise’? 9
Company Updates....................................................................................................... 11
Mahindra & Mahindra 12
Maruti Suzuki India 15
Hero Honda Motors 18
Bajaj Auto 21
Tata Motors 24