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Auto: FY02 in perspective

Jun 19, 2002

FY02 was a turnaround year for the auto sector as a whole. A number of factors including slowdown in the economy, volatile monsoons, series of natural calamities and a change in regulatory regime had significantly affected growth prospects of the industry in the last three years. But it has to be said that the Indian auto companies have come of age. In this article, we have consolidated financial performance of key players like Telco, Ashok Leyland, Hero Honda, Bajaj Auto, TVS, M&M and Punjab Tractors in FY02 in order to vindicate the improvement in underlying fundamentals.

(Rs m) FY01 FY02 Change
Net sales 222,780 245,424 10.2%
Other Income 4,145 3,587 -13.5%
Expenditure 204,249 217,755 6.6%
Operating Profit (EBDIT) 18,531 27,669 49.3%
Operating Profit Margin (%) 8.3% 11.3%
Interest 6,176 5,662 -8.3%
Depreciation 8,645 8,876 2.7%
Profit before Tax 7,854 16,718 112.9%
Extraordinary items (744) 507
Tax 2,634 4,485 70.3%
Profit after Tax/(Loss) 4,477 12,740 184.6%
Net profit margin (%) 2.0% 5.2%
Market Capitalisation (Rs m) 212,892
Industry P/E (x) 16.7

Despite lack of any positives on the economy front, the auto majors have posted a 10% rise in sales for the full year ended March 2002. This was led by a number of factors. Motorycle demand continues to remain robust with industry volumes growing by more than 35%. Realising the shift in demand, almost all the two-wheeler majors have made a aggressive foray into the segment, with atleast three new models/variants launches by each. One of the key changes in this segment is that players are currently concentrating on developing indeginous models instead of relying completely on foreign technology suppliers like Suzuki and Kawasaki. The success of TVS's 'Victor' and Bajaj's 'Pulsar' has taken Indian auto manufacturers to new levels. However, geared-scooter and moped sales were sluggish for the third year in succession.

Another big booster for the auto sector was the recovery in commercial vehicle (CV) demand. After touching historically high levels in late 1990s, sluggish industrial sector and a fall in agricultural output had affected demand. But the trigger this time came from the government's thrust on road construction as a result of which demand for multi-axle and higher tonnage vehicles rose sharply. This was also aided by a 7% growth in farm output in FY02. Both combined led to a hardening of freight rates, positively impacting demand.

It was an encouraging year for passenger car manufacturers as well. The action was concentrated around segment B and C, which comprise of vehicles like Zen, Santro, Indica, Corsa and Siena. Indian auto manufacturers have been able to upgrade the erstwhile Maruti-800 aspirants by positioning new vehicle under value-for-money proposition. Tata's 'Indica V2' success marked the comeback of the Indian auto major, which has not looked back since. Overall passenger car demand is estimated to have risen by around 8%. But all was not rosy in FY02. Tractor segment continues to suffer from severe competition and excess supply consequently resulting in lower realisations. Demand for UVs was stable and there is not much to talk about light commercial vehicle (LCV) segment.

Another interesting aspect in the current year was the improvement in operating margins. Auto manufacturers are currently focusing on reducing the number of vendors, value engineering efforts and lowering inventory requirements by implementing SAP systems, which has already started to yield results. But one has also got to keep in mind that margins in FY01 witnessed a sharp fall for most companies on account of new emission norms. Nevertheless, we expect operating margins to improve in FY03 as well. Barring M&M and Punjab Tractors, all others have taken advantage of lower interest rate regime to retire high cost debts. Tax provisions have increased dramatically on account of new accounting norms for deferred taxation. But for higher tax outgo, growth in combined profitability would have been even higher.

What is the future outlook for the industry? We expect motorcycle volumes to grow at a slower rate of around 18% in FY03 and the slide in moped volumes would continue in the future as well. But geared-scooter volumes could stabilise at the current level. Led by increased demand for multi-axle vehicles (it is estimated that more than 40% of total CV sales in FY02 were multi-axle CVs), hardening of freight rates and replacement demand, CV sales would rise in FY03 as well. Given the intense competition in the passenger car segment, it is going to be a difficult year for manufacturers in terms of pricing.

While overall industry prospects looks promising, on peer value comparision basis, one has exercise caution while selecting stocks. The industry P/E (calculated on the basis of market capitalisation of the seven players and earnings) is currently at 17x, which is on the higher end of the spectrum.

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