Auto: On a sound footing, but... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Auto: On a sound footing, but...

Apr 13, 2006

Domestic auto companies have reported robust growth in volumes sales in the past few months. The effect is likely to be filtered into the fourth quarter numbers that are slated to be announced soon. However, at the outset, we would like to inform investors that automobile sales are seasonal in nature. With this reasoning, here are the key things that investors should keep in mind. For the purpose of this article, we have considered the financial numbers of seven companies that form a part of the Quantum universe.

QIS Companies (volumes growth YoY)
Segment 4QFY06 9MFY06 1HFY06
Two Wheelers 19.2% 17.5% 16.6%
Passenger Vehicles 7.2% 6.7% 6.4%
M&HCVs 15.0% -1.3% -14.3%
LCVs 52.1% 37.8% 27.7%
Volumes All-round performance: As can be seen from the table below, 4QFY06 has been a good quarter for all the segments of the automobile industry. Specifically, Maruti's 'Swift', M&M's 'Scorpio' and the utility vehicles of Tata Motors have led the growth in the passenger vehicle segment. In the medium and commercial vehicle (M&HCV) segment, Tata Motors not only controlled the decline in its volume growth but also registered a robust growth during the quarter. The LCV segment continued to be the best performing segment, primarily led by Tata Motor's 'Ace'.

Realisations: Average realisations for an auto company are a function of the competitive pressures and product mix. In this respect, 4QFY06 could be a mixed bag. While most of the companies resorted to price hike in the months of December and January, post the budget announcement of excise reduction, car makers reduced their prices significantly. 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 5% YoY growth in utility vehicle sales, M&M is likely to benefit from improved realisations due to higher sales of 'Scorpio' and 'Bolero' and also tractors (as they have better margins). We expect Tata Motors to have relatively better average realisations in 4QFY06 as compared to 9mFY06 on account of higher sales of its M&HCVs. However, competitive pressures may e 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 auto majors. 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 during the current quarter, as most of the auto companies have renewed their long term contracts in the month of September/October 2005. To give a perspective, average domestic steel prices during 4QFY06 declined by 16% YoY and were almost flat on a sequential basis. However, 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's ruling banning overloading of trucks.

How have individual players performed on volumes front?

(Volumes YoY growth) 4QFY06 9MFY06 1HFY06
Bajaj 29.1% 23.5% 20.4%
Hero Honda 12.7% 15.0% 16.3%
TVS 18.2% 13.9% 11.6%
Maruti 5.2% 6.9% 8.0%
Tata Motors 23.0% 9.9% 0.0%
Ashok Leyland 11.0% 14.6% 11.0%
M&M* 9.3% 12.5% 12.0%
* Including tractors

The above table reflects the volume performance of various companies under our coverage. However, while the price hikes should have benefited the companies, to what extent this was guided by the cost-push factor is still to be ascertained. Having said that, improving realisations should benefit companies with better product mix. Going forward, it will also be important for companies to take control of their operating expenses. The interest expense and depreciation aspect should be viewed from the perspective of the entire financial year, as there could be a huge interest liability in one quarter, which could distort the actual performance.

To conclude, most of the positives of 4QFY06 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 stocks from the sector, investors have to be really selective while investing in the same.

Equitymaster requests your view! Post a comment on "Auto: On a sound footing, but...". Click here!

  

More Views on News

Massive Surge in the Shares of Tata Motors Today. Key Factors Favouring the Rally (Views On News)

Oct 13, 2021

Tata Motors zooms 23% after report of TPG investing Rs 75 bn in EV arm.

India's Edge in Electric Vehicle Stocks podcast (Views On News)

Sep 9, 2021

India has a huge advantage in using climate friendly EV batteries.

Eicher Motors' Earning Meets Estimate. Stock Under Pressure Amid CEO Exit and Chip Shortage (Views On News)

Aug 13, 2021

Robust performance by Royal Enfield in the international market gives a lift to Eicher's topline.

4 Ways to Play the EV Opportunity (Views On News)

Sep 6, 2021

The EV disruption is happening faster than you think. Here's how you can ride the Indian EV megatrend.

Semiconductors Are Big News. Here's What You Should Know... (Views On News)

Jul 27, 2021

The global semiconductor chip shortage is likely to continue till 2022 before it eases gradually.

More Views on News

Most Popular

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE AUTO


Nov 26, 2021 (Close)

COMPARE COMPANY

MARKET STATS