Automobile stocks continue to languish - Views on News from Equitymaster

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Automobile stocks continue to languish

Nov 24, 2000

The current financial year has not started on a very good note for the automobile sector. Automobile stocks on the whole have under performed the market as they faced declining volumes, lower margins and higher competition.The implementation of the uniform sales tax has had an adverse impact on most automobile companies as the price of their vehicles rose as a result of the above. In states where the sales tax was 4% earlier, it has now gone upto a uniform level of 12% across the country.

Besides the drought conditions in the earlier part of the year, the slump in agricultural production have added to the slowdown. Normally, the second half of the year is much better than the first half for automobile companies. However, the slowdown in agricultural production is anticipated to leave its mark on the second half as well.

The recent oil price hike too has acted as a dampener. What is worrying even more is the fact that diesel consumption has fallen in the last couple of months and other sectors are facing a slowdown. Hence the demand for commercial vehicles continues to be weak with no signs of a pick up.

Auto stocks under perform the market
(in Rs)23rd Nov 20006mths ago1 year ago
Bajaj Auto 263343407
% change -23.3%-35.4%
Telco 84131225
% change -35.9%-62.6%
Mahindra & Mahindra 144187436
% change -23.0%-67.0%
Punjab Tractors180208361
% change -13.5%-50.1%
Escorts 83113163
% change -26.5%-49.1%
Hero Honda8327951120
% change 4.7%-25.7%
BSE sensex 3,853 3,944 4,636
% change -2.3%-16.9%

Inspite of the above negative factors, certain automobile stocks do look attractive on a long term basis. Telco, India's largest commercial vehicle manufacturer is very well positioned to benefit from the turnaround in the sector. In the short term too, this stock will benefit from its tie-up with an international car major.

Punjab Tractors, whose stock price is currently down, looks attractive due to its strong brand, conservative financing policies and high margins. Besides, Hero Honda continues to be a market leader in the growing motorcycle industry. Its ability to come out with new fuel efficient products and strong EPS growth of over 30% over the next few years, makes it attractive at current levels.

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