Nov 10, 2006|
Auto: Getting tough out there!
It is said that when the economy does well, the auto industry also performs strongly. While the growth in the industry does not necessarily translate into a gain in the stock markets, nothing could be further from the truth if one looks at a performance of the auto companies on the Indian bourses. Riding on the back of strong growth in volumes, most of the companies from the sector have given good returns over the last one-year. Let us have a look at the leaders and laggards among the Indian auto companies vis-a-vis the benchmark indices.
* As on the afternoon of 9 Nov
As seen from the table above, while all the four-wheeler companies have outperformed the benchmark indices in the period under consideration, none of the two-wheeler companies have managed to achieve the feat.
As far as the performance of the four-wheeler companies is concerned, all the companies have been able to sweat their assets more, thus resulting into a strong showing at the bottomline. Thanks mainly to the continued growth of the Indian economy; the last year has seen growth practically across all the segments of the four-wheeler industry. As a consequence, companies were in a position to utilise their capacities effectively thus allowing the operating leverage to kick in. It should be borne in mind that the industry is characterised by high fixed costs and hence when volumes improve, the impact is directly felt on the bottomline. The fact that most of the companies sported a squeaky-clean balance sheet (debt and working capital levels under control) and had a rather benign capex also added to the growth in profits.
Although most of the companies witnessed an increase in their fortunes owing to favorable industry conditions, M&M, the highest gainer among the pack, also got a big kicker owing to the robust performance of its various subsidiaries.
On the two-wheeler front, while volumes remained strong, the past one-year was marked by cutthroat competition among incumbents thus resulting into price wars and the subsequent pressure on margins. Motorcycles, which account for more than 80% of all two-wheelers sales continued to grow at double-digit rates but the segment witnessed launch of several new models, thus making it difficult to choose a winner. Investors reacted rather poorly to this scenario and sensing that margin pressure was likely to affect the performance in the medium term, did not reward them as adequately as their four-wheeler counterparts. In fact, Hero Honda, the market leader was the only player in the above list to have its market cap erode in the past one year.
We would like to draw the investors' attention to the fact that four-wheeler companies are more prone to economic cycles than their two-wheeler counterparts. However, we would also like to point out that certain structural changes in the economy has led to increase in disposable income of the Indian consuming class and this might put the growth in car demand on a higher trajectory in the future. Thus a CAGR of 10%-11% over the long-term cannot be ruled out. On the other hand, two-wheeler companies would continue to show a stable long-term growth in the region of 10%-12%, with motorcycles outgrowing the industry by a couple of percentage points. Apart from similarity in growth, another factor that binds the two together is rising competition. This is likely to exert margin pressure and affect bottomline.
In these trying conditions, the company (be it in the two-wheeler or four-wheeler segment), which is able to sweat its assets more and hence generate more cash from operations, will be able to weather the storm better. Higher amount of cash will ensure that the company's balance sheet is strong enough to fund new models, a key to survival in a competitive environment. Therefore keep an eye on the cash that the company generates internally and base your investment decisions accordingly.
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