Sep 26, 2012|
1992 batch of Sensex stocks: Hindustan Motors
If one had invested Rs 100 in Hindustan Motors (HML) at the start of 1991 - more than 2 decades ago - his investment would currently be down by about 10% in absolute terms. It would not entirely be wrong to say that the stock price movement over this long period pretty much reflects HML's story.
Founded in 1942, HML - part of the CK Birla Group - was once the largest car manufacturer in India - prior to the rise of Maruti Udyog (now, Maruti Suzuki). The company's scrip was excluded from the BSE-Sensex, - along with those of fourteen other companies, on 19 August, 1996. HML manufactures the classic 'Ambassador' vehicle. While the car may be an iconic one, the fact remains that the trend in its sales has not in any way mirrored the overall trend of the passenger vehicle sales in India. The company recently announced a new look for the Ambassador. But in a world where looks of a car matter, amongst other things, it failed miserably as the version looks exactly like the earlier one.
Further, HML also has a tie up with Mitsubishi Motors, through which it sells and markets the latter's vehicles in the country.
A glance at the numbers...
A quick look at HML's historical financial performance sums up things well. Its standalone profits have been in the red 10 times out of the past 16 years (not adjusted for extraordinary items). In fact, in the past five years, HML has been making losses at the operating level itself.
HML's standalone revenues peaked in FY00 when they stood at Rs 12.5 bn (gross figure). However, it reported a loss of Rs 623 m during the year. Since 2000, it's been a one-way journey for the company's revenues - downwards. In fact, FY12 saw the company report its lowest 12-month period standalone revenues (since FY97) at about Rs 5.9 bn (gross) with losses of Rs 300 m.
Coming to some of the other key numbers - HML has earned free cash flows only twice in the past sixteen years. The company's debt to equity ratio averaged to 2.4 times over this period. Its liquidity position worsened over the years as its current ratio fell from over 2 times in late nineties to about 0.5 times in the past two years. Mind you, negative working capital is not a normal phenomenon in the auto industry.
Failing to cope up...
With the opening up of the economy in the early nineties, a number of foreign players entered the Indian markets through joint ventures and tie ups. While HML tried to remain competitive by launching variants of its vehicles, its competition eventually left it way, way behind.
HML's joint venture (in the late nineties) with Mitsubishi was expected to be the much needed turnaround for the company. However, the hype soon faded as volumes did not match expectations.
Back in 1992, it would have been difficult not to consider Hindustan Motors as an investment proposition. After all, who doesn't like a company which pretty much rules the roost in its respective sector? Apart from Ambassadors, the other few 'popular' models on the roads were the Fiats and the few models - namely Padmini and 118NE - of Premier Limited.
The auto industry has been booming in the past few years, with companies reporting the highest sales volumes year after another. HML was a company which was in a sweet spot - given its early mover advantage and a good understanding of the Indian auto market. However, it failed to adapt with the fast changing environment; and now it seems that only a major overhaul in operations can get HML back on the road.
||Devanshu Sampat (Research Analyst) has a degree in commerce and nearly 5 years of experience in equity research. He draws inspiration from successful value investors across the globe and constantly endeavours to refine his own unique stock picking approach. While a firm advocate of the principles of value investing, he believes in adapting a versatile investing strategy in response to varying market conditions. Devanshu contributes to our Megatrend investing service The India Letter.
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