X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
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

Hero Motocorp Ltd: Strong Festive Demand Drives Growth! (Quarterly Results Update - Detailed)

Nov 14, 2017

New Products and rural pickup to help market share gains.

Mahindra & Mahindra Ltd: All-round Show (Quarterly Results Update - Detailed)

Nov 14, 2017

Robust Performance, expects strong uptick in the farm equipment business.

Bajaj Auto Limited: Showing Healthy Signs of Recovery! (Quarterly Results Update - Detailed)

Nov 10, 2017

Exports markets recovering and new Permits for three-wheeler business in India will lead the growth!

More Views on News

Most Popular

Pick the Best Multibagger Stocks in 2019

Every investor is looking for multibaggers stocks. Get free guidance for buying the best multibagger stocks online in india a...

My Top 3 Defence Stocks to Buy Now(The 5 Minute Wrapup)

Mar 19, 2019

The urgency to privatise India's defence sector to make India self-reliant was never as strong as it is today.

5 Fundamentally Strong Stocks to Pick for Trading Today(Profit Hunter)

Mar 15, 2019

5 fundamentally strong stocks one could buy to trade in this market right now. Make sure you grab the chance this strongly rallying market offers.

This Small Cap Stock Could Offer Triple Digit Gains from its Current Price(Profit Hunter)

Mar 19, 2019

If you are still waiting for signals, remember, there is no correct timing, only right time to Buy stocks. For select small caps, that time is now.

Elections Don't Matter!(The Honest Truth)

Mar 13, 2019

Ajit Dayal shows us why from the point of view of the Indian economy, elections don't matter.

More

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE AUTO


Mar 25, 2019 03:37 PM

S&P BSE AUTO 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS