May 2, 2006|
Auto: Not just about volumes
With the fourth quarter result season beginning on a good note for automobile companies (Maruti), there has been a renewed interest in stocks from the sector. While the effect of good set of volume numbers is likely to be filtered into the fourth quarter numbers, it should be noted that the automobile players should not be judged only by their volume performance. A long-term investor should consider a number of other factors before making an investment in automobile companies. In this article, we have outlined some of such factors.
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)
Competition: This is an important factor that an investor should consider. The key question that needs to be addressed is whether the company has the capabilities, to withstand the competition and improve its competitive edge. A good set of numbers in a particular quarter/year could be the result of 'launch of a new product' but the real demand will come with a lag, say after a period of nine to twelve months.
Ability to introduce new models: The ability to withstand competition can be determined from the past product launches (quality as well as quantity) and more importantly the portfolio of product in the future. In the current dynamic auto industry, where the replacement age is on a decline, the ability to introduce new products on a sustainable basis is a key to success. The best example of this would be TVS Motor, which over the past few years, failed to capitalise on the robust motorcycle demand but has picked up pace in the current year with a slew of 'new and good' launches.
Marketing and distribution network: Apart from the ability to introduce new models, marketing and distribution network is another important factor for the success of automobile players. The better the geographical spread of dealers, after sales services and the marketing network, more is a company likely to capitalise on the growth opportunities. This is one of the reasons that Maruti has been able to withstand increasing competition (in fact, recover some of the lost ground in last two years).
Wider geographic and product reach: The automobile industry by nature is cyclical. In such a case, it is prudent to invest in a company that has wide geographical spread globally. This is because a diverse source of revenue can provide cushion against country related and segment related risks. A larger presence in the international market also indicates the technical capabilities of the company.
Valuations: As far as equities are concerned, valuations are the culmination of the entire investment process and an auto stock is no different. An investment decision should be driven by prudence, which is determined by the valuations.
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 and cautious.
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407