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Auto: Gaining momentum - Views on News from Equitymaster
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  • Feb 4, 2002

    Auto: Gaining momentum

    If one were to look at the performance of auto scrips on the bourses, with a spurt in prices, valuations have almost doubled for select companies. While the reasons for this optimism are understandable, is the rally for real? In this article we look at the performance of the auto sector in general and select companies in particular.

    Industry volumes have risen 8.5% to 3.3 m units between April-November 2001. This was primarily led by the motorcycle segment, for which demand continues to remain robust. Motorcycle sales have increased sharply by 31.1% to 1.8 m units in the same period. If one were to exclude this segment for analysis sake, industry volumes have dipped by 10.3%. This is one account of a 16% fall in light commercial vehicles (LCVs) and a 31.4% fall in moped volumes. Change in consumer aspiration and a slew of new product launches have taken a toll on scooter and moped manufacturers. Passenger car sales, after remaining sluggish in the first quarter of the current fiscal, increased in 2QFY02. Apart from multinationals like Hyundai and Ford, domestic passenger car manufacturers like Telco managed to outperform industry growth by a notable margin.

    The sectoral outlook...
    (Nos) Apr-Nov'01 Apr-Nov'02 (% change)
    M/HCVs 49,882 51,927 4.1%
    LCVs 38,811 32,601 -16.0%
    Cars 388,387 382,173 -1.6%
    UVs 77,787 80,043 2.9%
    Motorcycles 1,398,786 1,833,808 31.1%
    Scooters 635,192 623,123 -1.9%
    Mopeds 486,663 333,851 -31.4%
    Total 3,075,507 3,337,526 8.5%
    Source: CMIE

    But the highlight is the rise in commercial vehicle demand (CV), which seems to be on the path to recovery. Demand for CVs remained sluggish in the last three years due to a variety of reasons. Natural calamities, uneven monsoons and a subdued investment scenario, which affected domestic freight movements. Subdued freight rates also resulted in lower CV demand offtake, as transport operators postponed fresh purchases. Thanks to the initiatives taken by the government on the infrastructure front combined with a higher agricultural output, CV demand has already started to show signs of improvement. Medium and heavy CV sales have risen by 4.1% between April-November 2001.

    Even with M/HCV segment, demand for higher tonnage vehicles i.e. above 16 tonnes has been consistently on the rise over the years and is expected to continue in the future. Already, Telco and Ashok Leyland have increased their presence in this segment. However, there is a caveat. Though demand has increased in the current year in light of higher agricultural output and stable freight rates, for demand to sustain in the long run, the economy has to grow at a faster rate. In fact, when we spoke with Mr. Bharuka, Managing Director, Goodlass Nerolac (one of the key suppliers of automotive paints), he opined that the slowdown in the industrial sector and a subdued investment scenario are a cause of concern. If the government fails to accelerate reforms on this front, growth potential could be limited.

    If one were to take a closer look at valuations, Ashok Leyland and TVS are trading at a comparatively higher P/E multiples. While Ashok Leyland is turning around with a much more diversified product portfolio, it has to contend with a formidable player in the form of Telco. Though Ashok Leyland is increasing its presence in the Northern states, it is still far lower compared to Telco. Besides, it will not take Telco too long to establish a dealer network in the Southern region, which is not the case with the former.To that extent, the risk profile increases. TVS with the exit of Suzuki still has a long way to go. Though the company has successfully launched a new motorcycle model (Victor), competition has increased manifold. This combined with a slowing moped segment is a cause of concern. Bajaj Auto has made a mark in the motorcycle segment (25% share). However, demand for geared scooters, which contribute to a large portion of the turnover coupled with the high exposure to the stock markets have increased its risk profile.

    Valuations at a glance...
    (Rs m) Hero Honda TVS Bajaj Auto Telco Ashok Leyland
    Price (Rs) 318 273 441 127 73
    Number of shares (m) 199.7 23.1 101.2 255.9 118.9
    EPS (Rs)* 26.7 18.5 42.8 NA 4.5
    P/E (x) 11.9 14.8 10.3 NA 16.2
    Market Capitalisation 63,505 6,306 44,629 32,499 8,680
    Sales* 48,778 20,818 39,244 70,906 17,377
    Market cap/sales (x) 1.3 0.3 1.1 0.5 0.5
    GPM (%) 15.6% 6.1% 16.1% 8.1% 15.2%
    RONW (FY01) 39.2% 17.5% 10.0% NA 7.8%
    *3QFY02 annualised

    Telco, on the other hand, has clearly taken advantage of its leadership position in the CV segment and would continue to do so in the coming years. Also, Indica V2 sales has been on the rise in the last few months and it seems that the company has a few more under cover (Indica Sedan and Magna are a few of them). But again, competition has intensified further with Fiat gaining market share at a faster clip with the launch of Palio. Also, Telco is yet to prove on the reliability front, which is critical for passenger car manufacturers.



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