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The Equitymaster Research Digest

An Auto Analyst's Dilemma, MFs Dump FMCG stocks, and More...
Feb 10, 2016

Auto Analyst's Dilemma - Making Volume Projections

'Auto stocks have run ahead of their fundamentals - seems like a good time to book profits.' The 'this-guy-has-no-clue-what-the-hell-he's-talking-about' reaction I got to this statement has been stuck in my head ever since 29 November 2010.

That was the day my cousin got married. I was talking to a guest at the wedding. We started discussing stocks shortly after he found out what I did for a living.

The markets were booming at the time. Back then, I used to actively research companies from the auto/ auto ancillary space.

It turned out that my broader call was bang on: The next couple of years were awful for the markets; this was pretty much the scenario till the market lows of 2013 when the trend reversed.

This little incident came to my mind just the other day. Curious to know what was happening around a crowded desk (where the current auto sector analyst sits), I pulled my chair up as well.

The discussion had to do with forecasting future volumes for a company. It was difficult to predict because the sub-segment the company is involved in is not going through its best phase - two years of back-to-back negative growth for the entire segment.

However, to overcome this cyclicality, there is a method that one can use...the one prescribed by Peter Lynch in Beating the Street.

His approach was to normalise the growth. For instance, a company's sales volumes grew 10% per annum for a decade. Suppose this growth trajectory will continue. Thus, one could simply chart the actual volumes alongside the normalised growth figures. It would look something like this...

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