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On the brink of a turning point in fortunes - Views on News from Equitymaster
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  • Apr 28, 2001

    On the brink of a turning point in fortunes

    The automobile stocks have been very active on the bourses in the last fortnight, after more than a year of continuous hammering. The main reasons for this being: 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 as volumes are unlikely to get worse from recent levels.

    The incentives given to the automobile industry in the recent budget has resulted in investor interest towards this sector. The reduction in excise duty for passenger cars and two wheelers will result in giving a boost to volumes in the current year as prices have already come off. While this does hold more or less certain for the passenger car industry, the two-wheeler market is facing a slowdown in volume growth since December 2000 mainly due to lower rural demand.

    Motorcycles dominate two wheelers
    % market share FY96 FY97 FY98 FY99 FY00 FY01
    Scooters 46% 44% 41% 39% 33% 24%
    Motorcycles 30% 33% 37% 41% 48% 57%
    Mopeds 24% 23% 21% 20% 19% 19%

    The scooter market has been on a decline for a long time. Added to this, a decline of over 2 percent in agricultural growth in FY01 (fiscal year 2001) has resulted in sluggish moped and motorcycle sales in the past few months. 60 percent of demand for these segments is from the rural areas. Besides the threat of import of motorcycles from China is likely to lead to a pressure on volume growth of domestic players. After the recent hike in import duty from 35 to 60 percent for two wheelers, the effective duty works out to close to 95 percent. With this higher duty though Chinese motorcycles may not be much cheaper from their Indian counterparts, the fact remains that China has a huge underutilised capacity and could flood India with a variety of models at different price levels. Besides, domestic competition in the 100 cc mobike segment is rising due to entry of more players in the current financial year.

    The prospects for the passenger car industry however seem brighter. The recent exim policy permits imports of only right hand cars that are not more than three years old. This should prevent import of cars from the United States of America, a market that cannot be undermined. Another factor to discourage the flood of second hand cars is the stipulated 105 percent import duty, the effective duty for which works out to close to 180 percent. To discourage the existing foreign car companies in India from importing new CBU's (completely built units) from their parent companies, the government has amended the import duty on this segment from the earlier 35 to 60 percent.

    Passenger cars slowed down in FY01
      Cars sold % growth YoY
      (April-Feb 01)  
    Maruti Udyog 305,502 -14.0%
    Hyundai Motors 76,711 13.7%
    Telco 39,247 -19.0%
    DCM Daewoo 40,673 19.6%
    Hind. Motors 22,824 -2.5%
    Ind. Auto 8,740 -54.3%
    Honda Siel 8,740 4.2%
    General Motors 7,208 215.0%
    Ford India 15,267 158.4%
    Mercedes Benz 628 -19.1%

    Another rider that has been attached is that imports will be permitted only from the Mumbai port. Hence the additional octroi and transportation costs to take the cars to their final destination may make these imports unattractive. All these measures should provide relief to manufacturers of passenger cars.

    Volume growth for commercial vehicles and passenger car companies on a month on month basis has seen an improvement from January to March 2001. However it cannot be said at this point whether this growth is sustainable, as it is a little early and companies tend to beef up their volumes in the last quarter by giving incentives and discounts. However, it does seem that the worst declines in volume growth in the overall automobile sector are near the bottom of their cycle.

    In the commercial vehicles front, the budget has allowed 50 percent depreciation for new vehicles in the first year, to give a fillip to declining volumes in this sector. Another silver lining in the bus segment is the recent Supreme Court order that all buses plying in the National Capital Territory of Delhi have to be run on CNG fuel. In a bid to prevent pollution it is likely that other state governments too will get encouraged from such a ruling. This paves the way for better growth in the bus segment in the next couple of years.

    Ashok Leyland gains market share
    Company Market share
    M & HCVs* FY00 (April-Feb 01)
    Telco 66% 63%
    Ashok Leyland 34% 37%

    The automobile sector is cyclical and dependant on the growth of the economy and improvement in infrastructure. The overall optimism for the sector springs from the fact that the projections for industrial and agricultural growth for the current financial year are optimistic. These are based on the premise of a normal monsoon, which shall be the big deciding factor for gross domestic product in the current year.

    Besides the government's increased focus on infrastructure and construction in the current financial year should result in higher demand for vehicles in future as the number of highways and roads are expected to go up. Also the liberalisation of inter state movement of agricultural goods will pave the way for the increase in road transportation.

    Currently valuations for this sector are very attractive, as many of these stocks are trading at below their book values and offer appealing dividend yields. So as good news on the volume front for this sector starts to flow in, these companies could easily see a re-rating in their valuations. A time to revisit and relook.



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