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Auto: What in FY04? - Views on News from Equitymaster
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  • Apr 2, 2003

    Auto: What in FY04?

    The just concluded fiscal year 2003 was one of mixed fortunes for the auto sector. The momentum that the sector gained in September 2001 on the back of revival in both agriculture and industrial sector continued for the first nine months. However, the first signs of growth slowing down have started to emanate in the last quarter i.e. Jan-March 2003. We take a broader look at the performance of the auto sector during the course of the year and analyse in brief, the growth prospects for the coming fiscal (FY04).

    The verdict
    (Rs) 28-Mar-02 31-Mar-03 Change (%)
    Telco 126 157 24.3%
    Ashok Leyland 80 98 22.3%
    TVS 389 414 6.5%
    Bajaj Auto 469 482 2.8%
    Hero Honda 334 187 -43.9%
    Escorts 62 36 -42.6%
    LML 36 27 -24.1%
    Punjab Tractors 151 118 -21.8%
    M&M 114 99 -12.9%

    To start of with, consider the key gainers and losers among BSE 'A' Group in the auto sector. On the gainers front, Telco and Ashok Leyland top the list with TVS and Bajaj Auto also in the same league. However, when one considers the rise in market capitalisation over the last one year, commercial vehicle (CV) majors have outperformed by some margin. On the other hand, Hero Honda had one of its worst years, atleast on the bourses, with the stock price tumbling by 44% in FY03. The woes of tractor manufacturers continued unabated in FY03 as well, which is reflected in the table above. Of the top losers, three companies' are from the tractor sector. Despite tasting success after the launch of 'Freedom', an executive segment model, the stock market verdict has been a thumb down for LML in FY03 (down 24%).

    CVs lead the way
    ('000s)* 2002 % 2003 % Change (%)
    Tractors 173.1 18.2% 150.8 16.1% -12.9%
    Cars 543.8 57.3% 523.9 55.8% -3.7%
    UVs 109.7 11.6% 118.9 12.7% 8.4%
    LCVs 46.8 4.9% 54.2 5.8% 15.7%
    Buses & CVs 75.4 7.9% 91.0 9.7% 20.7%
    Total 948.8 100.0% 938.7 100.0% -1.1%
    (*for April-February)

    Coming to the performance of the auto sector in terms of actual units sold during the course of the year, on a consolidated basis, it a status quo kind of a scenario. Total volumes sold for the period ended April-February 2003 is marginally lower by 1% to 938,700 units. Poor performance of the tractor segment was one of the reasons for the weakness in overall unit sold. The sector has been adversely affected on the back volatility in monsoon over the last three years that in turn has had a negative impact on the agricultural sector. This combined with the ongoing inventory correction in an effort to reduce supply in the market weighed heavily on tractor manufacturers (production was reduced in an effort to clear existing inventory in the system). It is estimated that inventory has reduced to 50,000 units last month as compared to more than 100,000 units at the start of the fiscal year. We expect tractor volumes to register a 20% fall in FY03.

    On the other hand, CV sales continued to show strong growth on a month-on-month basis led by increased demand for tonnage. Riding on the back of a strong industrial sector revival and increased demand for higher tonnage vehicles, both Telco and Ashok Leyland posted impressive volume growth in FY03. With the government freeing inter-state transportation of food grains, CV demand showed resilience amidst poor monsoon and a weakening industrial sector towards the last quarter of FY03. There was a spillover effect on light commercial vehicle (LCV) demand as well. That said, LCV sector bottomed out in FY02 and as a result, growth in inflated to an extent. The Utility vehicle (UV) category witnessed a flurry of activity in FY03. New launches, both from M&M (Scorpio) and Toyota (New Qualis), provided a fillip to the demand. M&M's rural models like 'Road king' 'Maxx' also posted a stable growth in volumes in FY03.

    As far as the two-wheeler sector is concerned, it was a challenging year for the likes of Hero Honda. Competition intensified significantly in FY03 with both Bajaj Auto and TVS strengthening the product portfolio and in the process eating into Hero Honda's market share. We expect Hero Honda's share in the motorcycle segment at 44% in FY03 (50% last year). As a result, the company reduced its volume target for FY03 yet another time, which resulted in investor's pressing the sell button hard on the bourses. The stock marker verdict, given this backdrop, was that of a negative for Hero Honda and marginally positive for the other two. Though the performance of Bajaj Auto and TVS was impressive in FY03 in the motorcycle segment, in the geared-scooter and moped segments, there has been no support at all. After growing at a faster clip in the first half of the fiscal, YoY volume growth waned towards the end of the fiscal. The reason could be attributed to the poor performance of the agricultural sector.

    Having looked at the trend in FY03, what does FY04 hold for the auto sector as a whole?

    1. As against the last five-year CAGR of 30%, we expect motorcycle demand to grow at 12%-15% in the coming fiscal with the long-term growth aligning with the GDP growth in the next five years. The top three players viz. Hero Honda, Bajaj Auto and TVS are expected to launch a slew of new products (3 each) in FY04. We are cautious as far as the geared-scooter and moped segments are concerned. While ungeared scooter segment is expected to grow at 6%-8% in the coming fiscal, price realisations of all the top three players will remain depressed. Export volumes could perk in the long run with all key players eyeing the South East Asian market.

    2. The tractor segment is likely to come out of a trough towards the second half of FY04, provided we have a normal monsoon. The ongoing inventory correction is expected to near completion within the next six months, which should bring some respite to tractor manufacturers like Punjab Tractors and M&M. A long-term growth of 6%-7% is realistic considering the historical growth rate of the industry. We expect industry volumes to revert back to the five-year mean of 222,000 units in the next three years (around 159,000 units in FY03).

    3. CV demand is expected to weaken in the coming fiscal given the fact that the industrial sector has already started to show signs of weakness. GDP growth in the third quarter stood at 2.6% as compared to more than 6% in the corresponding period last year. Added to the woes is the sharp spurt in diesel prices over the last one year. In an depressed environment, transport operators will not be able to pass on the rise in input costs and therefore, CV demand is likely to suffer in the near-term. Following New Delhi, Mumbai has also adopted stricter environmental regulation for the passenger carrier segment. This should benefit both Ashok Leyland and Telco. That said, given the dismal financials of state transport undertakings, one is cautious for FY04. Growth is expected to taper down for the LCV segment also.

    4. As far as passenger car and UV manufacturers are concerned, the reduction in excise duty by 8% in the Budget 2004 will act as a trigger. However, given the rise in input costs, we do not expect players to pass on the entire benefit to consumers.



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    Aug 21, 2017 03:37 PM