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Auto: Not just about volumes - Views on News from Equitymaster
 
 
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  • 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)
    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%

    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.

     

     

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