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Auto: A good 3QFY06!

Feb 16, 2006

As the result season for 3QFY06 is over, we shall look at the performance of the Indian automobile sector. The real surprise was the faster growth in topline when compared to the volume sales (see table below). This was the result of a combination of factors. Firstly, the companies have announced a price hike in the current quarter. Secondly and more importantly, there has been an improvement in the product mix.

Financial snapshot (QIS companies)
Figures in m 3QFY05 3QFY06 Change
Units 1.8 2.1 12.4%
Sales 146,756 169,268 15.3%
Operating profit 18,885 23,148 22.6%
OPM 12.9% 13.7%  
Net Profit (inc extraordinary) 11,936 16,798 40.7%
NPM 8.1% 9.9%  

The expansion in the operating profits should be viewed in light of a significant reduction in the raw material costs. The companies have benefited from the weakening steel cycle. We have been stating that the benefit of the softening steel prices is likely to kick in post 1HFY06. Having said that, the auto companies have benefited slightly on a higher side than initially expected by us. But for other expenses, the operating profits would have grown at a faster pace. The increase in other operating expenses is primarily on two counts. Firstly, the companies intensified their brand building exercise in the current quarter. Secondly, almost all the automobile companies bore the brunt of fluctuation in foreign exchange rates. As compared to a notional gain reported in 3QFY05, the companies had to face forex losses in the current quarter.

Operating costs breakup (QIS companies)
Figures in m 3QFY05 3QFY06 Change
Raw material 104,689 119,371 14.0%
% Sales 71.3% 70.5%  
Staff Cost 6,211 6,922 11.4%
% Sales 4.2% 4.1%  
Other expenses 16,970 19,992 17.8%
% Sales 11.6% 11.8%  

At the first glance, the net profit shows a phenomenal growth of 41% YoY. However, a closer look into the performance reveals that the net profit from continuing activities has grown by 22% YoY, a tad lower than the operating profit growth. As can be seen from the table below, the 41% growth is due to non-recurring gains recorded in the current quarter as compared to the loss in 3QFY05. This again highlights the importance of separating the extraordinary items in the final analysis of the performance of the company.

Net Profit analysis (QIS companies)
Figures in m 3QFY05 3QFY06 Change
Net Profit (inc extraordinary) 11,936 16,798 40.7%
Extraordinary items (212) 1,963  
Net Profit (exl. extraordinary) 12,148 14,835 22.1%
NPM 8.3% 8.8%  

What to expect?
The automobile industry being a barometer of the economy, we expect the same to grow at a steady rate. However, investors should bear in mind that the growth rates would not be as high as those witnessed during FY03 to FY05, as most of the pent up demand of the period 1998 to 2002 has already been reflected in the performance of the industry during FY03 to FY05. In our opinion, automobile stocks in general are no more a 'value buy', and to that extent, investors should tread caution and be selective in their stock selection.

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