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Auto: Waiting for an upturn

Jul 6, 2001

A glance at the prices of some key auto majors on the bourses reveals that FY01 was a year of misfortunes for the Indian auto sector. The stock prices have more than halved barring a few players, who have managed to outperform the industry growth rate because of their ability to foresee future trends.

Tumbling valuations…
(Rs) 52-week high 52-week low Change
Telco 127 64 -49.6%
Ashok Leyland 109 53 -51.4%
Bajaj Auto 370 250 -32.4%
TVS Suzuki 250 94 -62.4%
Punjab Tractors 248 185 -25.4%
M&M 235 80 -66.0%
Hero Honda 233 145 -37.8%

The aggregate industry volume has declined by 2.7% to around 5 m units in 2001. The major segments, which contributed to this decline were the heavy commercial vehicle (HCVs) segment and passenger cars. Aggregate HCVs and car sales have fallen by a sharp 21% and 8% respectively in 2001.

2001 at a glance…
Category FY00 FY01 Change (%)
LCVs 60,222 62,864 4.4%
HCVs 111,095 87,588 -21.2%
Motorcycles 1,793,082 2,158,084 20.4%
Cars 641,617 589,994 -8.0%
UVs 123,488 126,949 2.8%
Tractors 267,700 249,124 -6.9%
Total (m) 5.2 5.1 -2.7%

First, the 12 m tonne fall in agricultural production, the highest in almost a decade, resulted in lower demand from fleet operators. Secondly, two consecutive years of less than average monsoon and lower GDP growth affected the purchasing power of rural India. Thirdly, sales tax rationalisation in some of the key states like Maharastra also added to the auto companies' woes. The impact of the slow down is apparent from the sales growth of key najors like Telco, Maruti, Bajaj Auto and Punjab Tractors. Barring Hero Honda, none of the auto companies had the foresight to gear themselves for Euro-II conversion norms, including Maruti Suzuki. As a result, significant investments were made to convert their engines and manufacturing processes in an effort to comply with Euro-II norms, which impacted profitability.

The motorcyle segment witnessed considerable activity in 2001 with total volumes increasing by a sharp 20% to 2.1 m units. A slew of new models from Bajaj Auto, Hero Honda, Kinetic and TVS Suzuki enabled this segment to notch higher growth rates. Hero Honda, thanks to its ability to foresee trends, has managed to outperform the industry growth rate by a significant margin. Be it the introduction of four stroke motorcycles or Euro norms, it was the leader. The success saga continues in 2002 also. In June 2001, the company has recorded a brow raising 36% growth in volumes.

So, where to from here? Telco's management believes that volumes in the first half of the current year may not rise. If the meteriological department is to be believed, monsoons in the current year, for the 13th consecutive year, will be 'normal'. Kharif production in the first half of the current year could indicate if the monsoons were 'normal' or not. If agriculture production improves towards the end of the year, commercial vehicle demand could show positive trend. Positive news are already filtering for the auto majors. Maruti, Hyundai, TVS Suzuki and Hero Honda have managed to register significant growth in volumes in the first two months of the current year. So, is it a new beginnning? Let's keep our fingers crossed.

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