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Auto: Take your pick - Views on News from Equitymaster
 
 
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  • Jun 7, 2003

    Auto: Take your pick

    Consider the graph below that represents the change in stock price of key automobile stocks on the bourses over the last one year (i.e. from 5th June 2002 to 6th June 2003). On the top of the charts are Mahindra & Mahindra (M&M) and Tata Engineering (Telco) with gains of 34% and 37% respectively. Just to put things in perspective, in the same period, the benchmark BSE Sensex has moved up by just 1%. On the other hand, Hero Honda has significantly under-performed the index (down 28% YoY).

    CVs and Bus:
    Also consider the performance of the auto sector, not on the stock market but at the ground level. As is evident from the table, the commercial vehicle (CV) sector has seen a sharp upturn in demand in 2003. M/HCVs registered a 31% rise in volumes in FY03 primarily led by higher demand for CVs with tonnage lower than 16 tonnes. Following the relaxation in inter-state movement of food grains, CV majors have seen a sharp rise in medium CVs in FY03. As a result, while overall sales rose in excess of 31%, contribution from higher tonnage vehicles fell from 42% last year to 40% in FY03.

    In short…
    (Units) FY02 FY03 Change
    Passenger cars 608,130 597,337 -1.8%
    UVs 122,561 137,082 11.8%
    LCVs 53,004 60,295 13.8%
    Bus 16,814 19,940 18.6%
    M/HCVs 73,185 96,227 31.5%
    Tractors 198,502 172,959 -12.9%
    Total 1,072,196 1,083,840 1.1%
    (Source: M&M website, ASOK and our estimate)

    With consumer durable sector showing positive signs of demand recovery, LCV segment also saw higher volume growth in FY03. The 19% rise in bus sales has to be viewed in the context of a 32% fall in sales last year (to that extent, growth in inflated). Telco, with a nation-wide footprint, took advantage of the upturn and extended its share to 67% in FY03 (64% last year).

    Stockmarket verdict:
    Telco - up 34% in a year and Ashok Leyland – up 13%.

    UVs:
    The performance of the utility vehicle segment was higher than our expectations of 8%. The introduction of new models from Toyota and M&M primarily led to a rise in urban demand. As against a 5% CAGR growth in the last six years, the segment grew at 12% to 137,082 units. M&M and Toyota were the major gainers here as compared to Telco. While M&M’s share increased from 46% in FY02 to 50%, Toyota saw a 40 basis points rise to 21%. The launch of ‘Scorpio with total volumes in the range of 12,000 units in FY03 (9% of industry volumes) has turned around fortunes for M&M.

    Stock market verdict:
    M&M – up 37% YoY.

    Two-wheelers:
    As expected, the two-wheeler sector continued to depend heavily on ungeared scooters and motorcycle segments for overall growth. It is expected that the motorcycle market grew by around 22% in FY03 with players like Bajaj Auto TVS and LML taking a larger share of the growth as compared to Hero Honda. Consequently, Hero Honda saw a 600 basis points correction to 44% in its market share in the same period. Geared scooter and moped segments continued their downtrend. In the ungeared scooter market, competitive and newer models from Honda Scooters and TVS resulted in Bajaj losing out to competitors.

    Stock market verdict:
    TVS – up 23%, Bajaj Auto – up 1% and Hero Honda - down 28%.

    FY04: What is on cards?
    To start of with, April 2003 has been a mixed one for the auto sector. While the passenger cars and UV segment has seen a 24% and 28% rise respectively in YoY volumes, both LCV and bus & trucks combined have posted a dip in unit sales. While the performance of monsoon does play a vital role in the short-term for sustaining growth, long-term growth drivers are in place. Low cost of financing, affordable financing schemes and the government’s ongoing infrastructure development project would play a key role in keeping the growth momentum going from a 3 to 5 year perspective. Our expectations of growth are – CVs: 7%-8%, UVs: 10%, tractors: stagnant and two-wheelers: 10%.

    Which stock should one buy at the current juncture? It is difficult choice considering the run up most of the auto stocks have seen in the last two years. But the valuation comparison table below should be useful. It is interesting to note that the two-wheeler majors are at the bottom of the table. This could be due to the fact that competition has increased manifold and there is intense competition and undercutting. Also, we expect volume growth at a slower rate for the motorcycle segment at 12% in FY04. This is true even for cars and UV segments. So, it is wise to exercise caution.

     

     

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