Auto stocks: Are high PEs justified? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Auto stocks: Are high PEs justified?

Sep 29, 2012

This is the third article in our series that analyzes some expensive stocks in specific sectors to understand if their valuations or "high PE" (price to earnings) multiples are justified.

In the first article of the series we looked at high PE food stocks and in the second, we discussed high PE steel stocks.

In this third article of the series we focus on and examine auto stocks which are trading at high PE multiples.

The automobile sector has been one of the worst hit victims of recent economic slowdown. The hike in fuel prices and depreciation of the rupee added to the woes of auto companies. From a list of 20 automobile companies, we identified four with the highest PEs, (in descending PE order) as Maharashtra Scooters, Maruti Suzuki, Eicher Motors and Mahindra & Mahindra.

Let's look more closely at the reasons for the relatively strong PEs of these companies.


Key financial parameters for 4 highest PE Auto companies
 Mah. ScootersMarutiEicherM&M
TTM PE222.425.217.517.3
Average growth (in %)
Sales-14.215.735.330.2
Net profits169.521.541.142.5
Average Profit Margins (in %)
Operating Profit229.212.07.614.7
Net Profit141.56.24.86.9
Return on Equity (in%)4.718.025.429.0
Note: Numbers are for last 10 years except TTM PE.
TTM: Trailing Twelve Month

Maharashtra Scooters (MS)

Maharashtra Scooters is a joint venture between Western Maharashtra Development Corporation (WMDC) and Bajaj Holdings & Investment Ltd. (BHIL, the erstwhile Bajaj Auto Limited). The company started with manufacturing geared scooters in 1970s. However, with the gradual shift of consumer preference to motorbikes, it ceased production of geared scooters in 2006. As of now, it produces die casting dies, jigs and fixtures used in two-wheeler and three-wheeler industry. In the past, Bajaj Auto has expressed its intention of buying out WMDC's stake. However, the two joint venture partners could not agree on the valuation.

As shown in the table, MS's average sales growth has declined 14% over the past ten years. Sales trended down from 2001 till 2009, and after that the company's sales started growing. During this 10 year period, the auto company's PAT grew by an average 17% largely due to extra ordinary PAT growth of 1692% in 2004. MS's operating net profit margins have been 229% and 141% respectively. We also note that both operating profits and net profits include "other income" which has grown substantially. A closer look reveals that most of growth comes from dividends earned, and NOT the core business of the company.

MS's PE is also extraordinarily high at 222, and possibly because investors have not analysed "other income" separately from net profit growth.

Maruti Suzuki (Maruti)

Maruti Suzuki is India's largest passenger car manufacturer with more than 60% share of the domestic car market. The company has been riding high on the increasing demand for cars in India and globally. During the past decade, the company's sales and net profit grew by an average15% t 21% respectively. Further, the average operating and net profit margin were 12% and 6% respectively, and RoE averaged 18%.

Although the company demonstrated decent past performance, lately, it has been facing a lot of labour troubles (including violence) which resulted in a couple of lock outs in its Manesar plant in the last year. This directly and negatively impacted the sales and earnings of the company. Maruti has taken steps to increase the remuneration and other benefits for its employees. However, it remains to be seen whether it is able to ward off any such labour trouble in the future. Despite this critical issue, Maruti's stock is trading at a high PE multiple of 25.

Eicher Motors (Eicher) and Mahindra and Mahindra (M&M)

Eicher Motors is a leading player in the commercial vehicle space. Royal Enfield has a strategic alliance with Eicher and manufactures motorcycles which are exported to over 25 countries.

M&M manufactures tractors and has a 42% share in the tractor industry. This gives it a competitive edge over its peers. To the benefit of M&M, agriculture will continue to be the priority area for the Indian economy and government.

During the past decade, the table shows that both companies have shown good sales growth averaging 35% and 30% respectively. Average PAT growth for both too has been similar at 41 and 42% respectively. Operating margins for the two companies were stable at 8% and 15% respectively, and so were profit margins of 5% and 7% respectively. This financial performance helped Eicher and M&M post high RoEs of 25% and 29% respectively. The high and interestingly similar PEs of 17.5 and 17.3 reflect good fundamentals for these two companies.

Conclusion

For Maharashtra Scooters, we observe that profits have grown significantly due to "other income" and not its core business. So, it seems that the company's unusually high PE of 222 is not based solely on the main business. And this may imply uncertainty in the company's future earnings.

Maruti Suzuki has shown decent numbers but lately is facing a lot of employee related issues. In the present scenario, Maruti's future prospects are very uncertain. The company also seems to have employee troubles in Haryana, and may consider manufacturing from Gujarat in the future.

The PEs of Eicher and M&M, 17 for each of them, seems to be based on the fundamentals of both these companies. These high PEs may partially be because both companies have good RoEs. However, investors need to dig deeper to understand if the strong RoEs are really due to operating results and so will be sustainable, or if this comes from some one time extra-ordinary event or "other income".

The high PEs of each company needs to be evaluated separately, and from our analysis it does not seem that the valuations of Maharashtra Scooters ("other income") and Maruti (labour uncertainty) are justified. But the PEs for Eicher and M&M may be more reasonable if their results truly reflect operating earnings.

Equitymaster requests your view! Post a comment on "Auto stocks: Are high PEs justified?". Click here!

2 Responses to "Auto stocks: Are high PEs justified?"

chandra mohan

Oct 6, 2012

high p/e are justified in high growth industry, but only to a limmited extent.automobile industry though growing at an exoplosive rate is also becomming highly competitive.w'nt be auto components a better bet now?

Like (2)

vshahs

Oct 1, 2012

Please improve article depth in line with the title. It should be more than some data and current news.

Like (6)
  
Equitymaster requests your view! Post a comment on "Auto stocks: Are high PEs justified?". Click here!

More Views on News

India's Edge in Electric Vehicle Stocks podcast (Views On News)

Sep 9, 2021

India has a huge advantage in using climate friendly EV batteries.

Eicher Motors' Earning Meets Estimate. Stock Under Pressure Amid CEO Exit and Chip Shortage (Views On News)

Aug 13, 2021

Robust performance by Royal Enfield in the international market gives a lift to Eicher's topline.

Hero MotoCorp Reports Substantial Rise in Net Profit. Is it Worth a Look? (Views On News)

Aug 13, 2021

The company improved its market share in the quarter by more than 2%. Can it achieve more?

4 Ways to Play the EV Opportunity (Views On News)

Sep 6, 2021

The EV disruption is happening faster than you think. Here's how you can ride the Indian EV megatrend.

Semiconductors Are Big News. Here's What You Should Know... (Views On News)

Jul 27, 2021

The global semiconductor chip shortage is likely to continue till 2022 before it eases gradually.

More Views on News

Most Popular

How to Find Undervalued Stocks

A short guide on identifying and investing in the most undervalued stocks in India.

Sansera Engineering IPO: Key Points to Consider (Views On News)

Sep 8, 2021

This IPO is a pure OFS and the company is looking to raise Rs 12.8 bn at the upper price band of Rs 744.

5 Stocks that Turned Rs 1 Lakh into Rs 1 Crore (Views On News)

Sep 7, 2021

Patience is one of the biggest virtues you need to have if you want to become a crorepati in the stock market.

The Top Stocks to Sell in this Bull Market (Profit Hunter)

Sep 8, 2021

When I saw the list of so-called 'value stocks' published by a leading brokerage, my worst fears came true.

5 Indian Companies that are Leading the AI Race (Views On News)

Sep 9, 2021

During the pandemic, India reported the highest increase in the use of AI at 45% compared to other major economies. AI has potential to add US$90 bn to the Indian economy by 2025.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2021
Get our special report Multibagger Stocks Guide (2021 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE AUTO


Sep 17, 2021 (Close)

S&P BSE AUTO 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS