Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Auto: On a sound footing, but... - Views on News from Equitymaster

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

  • MyStocks


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

Hero Motocorp Ltd: Strong Festive Demand Drives Growth! (Quarterly Results Update - Detailed)

Nov 14, 2017

New Products and rural pickup to help market share gains.

Mahindra & Mahindra Ltd: All-round Show (Quarterly Results Update - Detailed)

Nov 14, 2017

Robust Performance, expects strong uptick in the farm equipment business.

Bajaj Auto Limited: Showing Healthy Signs of Recovery! (Quarterly Results Update - Detailed)

Nov 10, 2017

Exports markets recovering and new Permits for three-wheeler business in India will lead the growth!

More Views on News

Most Popular

Are You Ready for the Big Nifty Move in the March Expiry?(Profit Hunter)

Mar 8, 2019

History suggests the Nifty could make a big move in March. Are you prepared to benefit from this opportunity?

5 Fundamentally Strong Stocks to Pick for Trading Today(Profit Hunter)

Mar 15, 2019

5 fundamentally strong stocks one could buy to trade in this market right now. Make sure you grab the chance this strongly rallying market offers.

Elections Don't Matter!(The Honest Truth)

Mar 13, 2019

Ajit Dayal shows us why from the point of view of the Indian economy, elections don't matter.

Two Growth Stocks that Doubled in a Little Over 12 Months!(The 5 Minute Wrapup)

Mar 13, 2019

The elements that fueled profit growth for these two companies led to a surge in their stock prices.

This is Why You Need to Buy Small Cap Stocks Now(The 5 Minute Wrapup)

Mar 15, 2019

Did you just miss the smallcap rally? Or is there still time to catch up? Read on for answers and more...


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Mar 20, 2019 (Close)