Apr 13, 2006|
Auto: On a sound footing, but...
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.
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'.
QIS Companies (volumes growth YoY)
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?
* 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.
More Views on News
Aug 14, 2017
Tata Motors Ltd disappoints again for both India and JLR business. Management commentary indicates a slow year ahead.
Aug 2, 2017
GST realted cost impacts Margins, Management expects good year ahead.
Aug 1, 2017
Good Recovery in the Scooters market, expects pick up in exports too.
Aug 1, 2017
New Export Markets picking up, Management expects good recovery in domestic Three wheeler market.
Jul 6, 2017
Ends the year on a Flat note. Expects good recovery in the exports market.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407