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Auto: Look before you ride! - Views on News from Equitymaster
 
 
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  • Feb 2, 2006

    Auto: Look before you ride!

    During the past twelve months, there has been a significant run-up in automobile stocks. With the auto players reporting a good set numbers for the quarter ended December 2005, and the markets rewarding them consequently, it has become more difficult for investors to select from a host of auto stocks. In this article, we have covered some of the key factors that investors need to consider before selecting an automobile stock.

    Segmental trend: Being a barometer of the economy, the automobile industry is cyclical in nature. Further, within the industry, there are different sets of factors that drive the various segments (two-wheelers, passenger vehicles and commercial vehicles and tractors). While commercial vehicle and tractor segments are highly cyclical, two-wheelers to an extent have a reduced element of cyclicality. This should be kept in mind before selecting an auto stock.

    Competition and position of the company in the industry: Another important factor that should be considered is the extent of competition in the industry. On this parameter, while the passenger car segment is the most competitive, commercial vehicles and two-wheeler segments are less competitive (as two to three player dominate the market). Linked to the above is the point of position of the company in the industry. For instance, while Tata Motors has a dominant position both in commercial vehicles and passenger vehicle segments, a player like Ashok Leyland is only a medium and heavy commercial vehicle player.

    Ability to introduce and market new models: This is one of the key factors that an investor should consider while deciding an auto stock. Currently, where replacement age of automobiles is on a decline, the ability to introduce new products on a sustainable basis is the key to the success.

    Now, apart from the ability to introduce new models, marketing and distribution strength is another important factor for the success of an auto company. The better the geographical spread of dealers, after sales services and the marketing network, more is the company likely to capitalise on the growth opportunities.

    Valuations: As far as equities are concerned, valuations are the culmination of the entire investment process and an auto stock is no different. An investment decision should be driven by the prudence, which is determined by the valuation that the stock is currently enjoying.

     

     

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