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Automobiles: Gaining interest

Apr 18, 2001

The automobile sector has attracted buying interest on the bourses in the last couple of trading sessions, after a long time. The reasons for this are many: attractive valuations, shift in investor preferences towards old economy stocks and the feeling that the auto sector performance seems to be quite close to the bottom of the trough.For some automobile companies, volume growth on a month on month basis has seen an improvement from January to March 2001. However we cannot say at this point whether this growth is sustainable, as it is a little early and companies tend to beef up their volume growth in the last quarter by giving incentives. However, we can say that the worst declines in volume growth in the overall automobile sector are nearing the bottom of the cycle.

(FY02E)Current
Price (Rs)
Gross profit
margin (%)
Net profit
margin (%)
EPS
(Rs)
DPS
(Rs)
Dividend
yield (%)
BVPS
(Rs)
Price/Book
value (x)
PE (x)
Punjab Tractors20020.2%13.2%22.210.05.0%80.52.59.0
M & M1229.1%4.8%16.24.53.7%185.70.77.5
Hero Honda13312.9%8.4%17.13.02.3%48.12.87.8
Bajaj Auto24811.8%10.9%37.69.03.6%292.30.86.6
TVS Suzuki1048.5%4.1%37.97.06.8%189.70.52.7
Telco* 686.4%1.0%2.82.53.7%115.90.624.3
Ashok Leyland5512.3%4.5%8.93.56.4%103.50.56.2
* figures are for FY00, as during FY02, Telco is expected to post a loss

Our optimism springs from the incentives given to the automobile industry in the budget as well as the fact that the exim policy too continues to protect the industry to some extent. As import of left hand vehicles into India have been banned as per the latest exim policy this should provide some relief to all the sectors especially passenger cars. This rules out imports from the US market, one of the largest markets. Besides the peak import duty for second hand vehicles at 105%, works out to an effective duty of over 180%.

The reduction in excise duty for passenger cars as well as two wheelers, too will help boost volumes in this segment, as prices of these vehicles will fall. Besides the accelerated depreciation benefit for commercial vehicles should also give an impetus to this sector.

The only worry currently is for the two wheeler segment currently, as the threat of cheap Chinese imports continues to loom large over the industry. Even after the 35% peak import duty on new vehicles, these vehicles are far cheaper than their Indian counterparts.

On the whole the recovery of automobiles depends on an improvement in the performance of the agricultural and industrial sectors which have languished over the past year. These are dependant on the monsoons, which will decide the fate of things in the coming year.

However currently valuations on future earnings for this sector do look attractive, with many of these stocks trading at below their book values. The dividend yield offered by some companies like Ashok Leyland and TVS Suzuki are very attractive. So any good news from any of the companies could easily see a quick run up in their share prices. A time to revisit automobile stocks.

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