Indian automobile dispatches after an impressive performance for over eighteen months, took a much needed breather with sequential decline of ~17% in monthly dispatches. Our interaction with dealers suggests that festive season offtake have been robust and with lower receipts from manufacturers, dealer's inventory levels have reduced during the month. We expect dispatches to remain subdued during the month of December before picking up in January'11. Except for Maruti Suzuki, dispatches by other automobile manufacturers declined by ~15-20% on a sequential basis. In the commercial vehicles segment, especially medium and heavy commercial vehicles (MHCV), sales have been adversely impacted due to emission norm changes and we expect this trend to continue for another month. However, LCV segment continued with their consistent performance. Tractor industry due to good harvest and higher crop prices have been favourably impacted.

Two-wheelers: Industry dispatches increased by ~15% to 1.05mn units. On a sequential basis, dispatches declined by 17%. After an impressive performance over last fifteen months, Bajaj Auto's growth fell to single digits at 8.1%.

Passenger Vehicles: In the passenger vehicle segment, barring market leader Maruti Suzuki, all other manufacturers reported double digit decline in their sequential dispatch figures. Maruti with strong demand for its compact cars and MPVs outperformed the passenger car industry. Hyundai exports collapsed to their lowest levels in the last three years due to weak demand for its products in the European market.

Commercial Vehicles: MHCV sales were stable on a sequential basis and we expect this to be maintained in the month of December too. LCV's continue to have a consistent demand growth.

We expect the automobile dispatches to remain subdued during the month of December before bouncing back in the new calendar year 2011. We remain positive on the prospects of the industry. We remain positive on the sector. Our top picks in the sector are Mahindra & Mahindra, Bajaj Auto and Hero Honda.

Hero Honda Motors (HH)

Hero Honda (HH) dispatches for the month of Nov'10 were below estimates with the company having dispatched 421k units against our estimate of 454k units. After record dispatches of 500k units in Oct'10, sales declined 16.7% MoM. On a YoY basis, sales were higher by 10.5%.

We expect the company to achieve a sales of 5.1mn units in FY11.

We reiterate `BUY' rating on the stock with a target price of Rs2,097 discounting FY12E earnings 18x.

Bajaj Auto (BJAUT)

Bajaj Auto (BJAUT) dispatched 299k units in the month of Nov'10 as against our estimate of 350k units. Dispatches for both motorcycles and three-wheelers were lower than anticipated. Motorcycle dispatches grew 9.3% YoY to 265k units. The company's flagship brands Discover and Pulsar accounted for 101k and 83k units respectively.

Three-wheeler dispatches were flat YoY at 34k units.

Exports were the bane area for the company during the month. As per the management, export figures were affected due to logistic issues. Exports were lower by 7.8% YoY to
91k units.

The management has given a guidance of 950k units for Q3FY11, translating to a balance of 280k units in Dec'10.

We reiterate our `BUY' recommendation on the stock with target price of Rs1,854 discounting FY12E earnings 18x.

TVS Motor (TVSL)

TVS Motor Nov'10 dispatch figures were disappointing with a 15-20% MoM decline across segments. Total dispatches declined 19.6% MoM to 157k units as against our estimate of
187k units. Despite the sequential decline, on a YoY basis sales were up 28.8%. Motorcycle sales jumped 39.7% YoY to 63k units. Scooter sales were up 44.4% to 36k units. Scooters have had an excellent run post launch of the Wego and dropped below the 40k mark after a gap of four months. Moped sales were higher by 7.9% to 55k units. Three-wheeler dispatches stood at 3,159 units.

Two-wheeler exports were a let down growing marginally by 2.4% YoY to 14k units, lowest in the last twelve months.

We maintain our `HOLD' rating on the stock with a target price of Rs85 discounting FY12E earnings 16x.

Maruti Suzuki India (MSIL)

Maruti Suzuki's dispatches for the month of Nov'10 at 112k were inline with our estimates. After a bumper sales in Oct'10, domestic sales remained above the 100k unit mark. The compact car segment witnessed a 32.2% growth to 74k units. The A3 segment too delivered a healthy growth of 27.2% to 11k units. However, launch of the Toyota Etios sedan will intensify the competition in this segment and will have an adverse impact on Dzire volumes.

The MPV segment has received a boost post launch of the `Eeco' at the Auto Expo in Jan'10. During the month MPV sales were higher by 76.5% to 15k units. YTDFY11, MPV sales have grown by 73.1% to 105k units.

We expect MSIL to have volumes of 1.24mn units in FY11 and 1.39mn units in FY12.

We maintain a `HOLD' rating on the stock with a price target of Rs1,586 discounting FY12E earnings 16x.

Mahindra & Mahindra (M&M)

Mahindra & Mahindra (M&M) auto segment dispatches for the month of Nov'10 were below estimate while tractor dispatches surprised us positively. The company undertook a plant maintenance shutdown during the month to coincide with the festive holidays thus curtailing production and dispatches.

Passenger UV sales were up a modest 6.6% YoY to 11.5k units and significantly below our estimate of 15k units. Pickup and SCV sales were higher by 40.6% YoY to 7.7k units. Three wheeler sales were up 8.5% YoY to 4.5k units. Logan's sequential growth streak came to an end with sales dropping 18.8% MoM to 876 units.

Good harvest in the current season have given a fillip to tractor demand. We were expecting a robust 34% growth during the month to 17k units. However dispatches of 18K units reflecting growth of 41.9% surprised us positively.

We remain positive on the stock and maintain a `BUY' rating with a target price of Rs894 based on SOTP valuation.

Tata Motors (TTMT)

An unprecedented fall in Nano volumes and a sharp fall in Indica dispatches during the month led to a significant deviation from our estimates for Tata Motors (TTMT). However, the commercial vehicle segment dispatches were as per our estimates. Total monthly sales were up marginally by 1% YoY to 55k units.

Domestic commercial vehicle sales were up 19% to 35k units. MHCV segment grew by
18% to 14.7k units while LCV's reported a growth of 21% to 20.3k units.

Passenger segment sales were highly disappointing declining 25.9% YoY to 15k units. The company is facing teething problems ever since Nano production has been shifted to the dedicated facility at Sanad, Gujarat from its Uttaranchal facility. Nano sales nose dived 85% to 509 units. Indica sales also suffered due to increasing competition declining 37% to 5.2k units. Indigo sales were stable at 6k units. The utility vehicle segment was up by 40% to 3k units. During the month the company launched its new crossover `Aria'.

We do not have a rating on the stock. However, we remain positive on the stock due to strong performance of Jaguar Land Rover and healthy demand for domestic CV segment.

Ashok Leyland (AL)

Ashok Leyland (AL) dispatches continued to disappoint with no pickup in sales during the month of Nov'10. The company dispatched 5k units as against our estimate of 7k units. Post implementation of new emission norms across the country from 1-Oct-10, AL sales have taken a hit as the pipeline inventory created is yet to be extinguished.

Domestic truck sales declined by 21% YoY basis to 2,132 units. Domestic bus volumes were higher by 14.7% to 1,710 units. Overall domestic dispatches were down by 8.3% to
3,885 units.

Exports were a saving grace with a growth of 179% to 1,252 units.

With poor dispatch figures in two consecutive months, the company would struggle to achieve its target volumes of 100k units during FY11. We retain our estimate for the year at 89k units.

We maintain our `HOLD' rating on the stock with a target price of Rs76 discounting FY12E earnings 14x.