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Auto: It's not just about volumes...

Jan 10, 2006

With the results season having already kicked in, soon to be followed by the results from auto majors, let us look at a few important points to be kept in mind while analysing the results of auto companies. At the outset, we would like to inform investors that automobile sales are seasonal in nature. With this pretext, here are the key things that an investor should keep in mind. For the purpose of this article, we have considered the financial numbers of the companies in Quantum Universe (7 companies).

QIS Companies (volumes growth YoY)
Segment 3QFY06 1HFY06 9MFY06
Two wheelers 12.5% 20.5% 17.5%
Passenger Vehicles 12.0% 4.0% 6.7%
M&HCVs 0.3% -2.8% -1.3%
LCVs 30.0% 42.6% 37.8%
Volumes - a mixed bag: As can be seen from the adjacent table, on the volumes front, the performance has been a mixed bag when compared with the 1HFY06 performance. Maruti's 'Swift' and the utility vehicles of Tata Motors led the growth in the passenger vehicle segment. In the medium and commercial vehicle (M&HCV) segment, Ashok Leyland has continued to perform well. However, Tata Motors remained a laggard with volumes growth being flat despite 'Tata Ace' notching strong growth in the LCV segment.

Realisations: Realisations for an auto company is the function of the competitive pressures and the product mix. Competitive pressures have restricted companies to resort to any significant price hikes during 3QFY06. Though few players have announced price increases, the benefits from these are likely to be reflected in 4QFY06. On the product mix front, Maruti is likely to benefit as it has been selling more of 'Swift' and also segment C (Esteem and Baleno) cars. Similarly, inspite of just 4% growth in volumes, M&M is likely to benefit from improved realisations due to higher sales of 'Scorpio and Bolero'. However, we expect Tata Motors to have relatively lower average realisations, as sales of M&HCVs have been flat. However, competitive pressures may have forced companies to offer higher discounts and other incentives, which could cap the benefits arising from better product mix.

Raw material costs: Raw material costs account for around 70% of net sales. Of this, the major contributor is steel (accounting for around 50% of net sales). Based on our interaction with various managements, we expect some benefit of lower steel prices to reflect in during the current quarter, as most of the auto companies have renewed their long term contracts in the month of September/October 2005. Having said that, average domestic steel prices during the current quarter have declined by mere 6% YoY, though the benefits to auto companies would be restricted to the extent of the contractual nature of their steel purchases. Secondly, freight costs have been on the rise on the back of the Supreme Court ruling banning overloading of trucks.

How have individual players performed on volumes front?

(Volumes YoY growth) 3QFY06 1HFY06 9MFY06
Bajaj 14.0% 29.6% 23.5%
Hero Honda 12.1% 16.8% 15.0%
TVS 11.2% 15.4% 13.9%
Maruti 13.6% 3.6% 6.9%
Tata Motors 12.4% 8.5% 9.9%
Ashok Leyland 1.1% 16.3% 14.6%
M&M* 13.4% 12.0% 12.5%
* including tractors
The above table reflects the performance of various companies under quantum coverage. It must be noted that the stock prices of all these companies have gone up by atleast 20% during the quarter under consideration. However, as stated earlier, the benefits of improved realisations are restricted to a few companies depending on their product mix. Further, though one can expect some benefits from lower steel prices, the same would not be significant. Therefore, what one needs to watch out for are the efforts of companies on the other operating expenses front. The interest expense and depreciation aspect should be viewed from the perspective of the entire financial year, as there could a huge interest liability in one quarter, which could distort the actual performance. To conclude, most of the positives of 3QFY06 seem to have already been factored into the current valuations of automobile stocks. Thus, in our opinion, considering that there is little value left across most auto stocks, an investor has to be really selective while investing in the stock of a particular company.

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