• FEBRUARY 16, 2001

Automobile stocks gain attention

The automobile sector continues to face declining volumes in the current financial year. This is now even spilling over to the motorcycle segment, which had reported robust growth rates earlier on. For the period April-December 2000, all segments of the industry have seen a pressure on volumes.

The sales tax rationalisation, drought conditions and slower overall economic growth have resulted in this decline. The slowdown in agricultural production too has had an impact on the demand for tractors and utility vehicles, as rural demand is not picking up. On the other hand, the motorcycle segment, which depends on the rural economy, too has continued to report robust growth rates due to the fact that it ate into the market share of scooters. The impact of the rural slowdown has finally started to hit the motorcycle segment. In December 2000 the volume growth of only 10% for motorcycles is a pointer towards this.

Volumes April - Dec FY01April - Dec FY00change
M & HCVs 57,593 76,167 -24%
LCVs 44,000 41,081 7%
UVs 87,194 83,047 5%
Cars 417,721 459,264 -9%
Scooters 686,622 934,730 -27%
Motorcycles 1,577,382 1,247,862 26%
Mopeds 532,018 526,541 1%
Three Wheelers 142,438 150,381 -5%
Tractors 184,673 202,979 -9%

On the costs side too, automobile companies have been hit by rising costs on account of marketing and advertising as well as higher compliance costs. This has resulted in a decline in operating margins for most of the automobile sector.

Despite the above and the fact that there are no signs of improvement in the automobile sector, the sector continues to attract buying interest on the bourses. The reasons for this are the expected automobile policy in next month or so, which is likely to protect the industry in a phased manner so as to prevent higher competition in the various segments of the industry. The reason being over capacity in all segments currently due to lower demand. The expected hike in rail freight rates and increased spends on infrastructure too is expected to give a boost to commercial vehicle demand in the coming budget. For passenger cars the reduction in excise duty seems to be the added attraction.

There are a couple of stocks in their segments which despite the slowdown look attractive due to their inherent strengths. In the tractor industry, Punjab Tractors has tried to maintain its margins in the 3QFY01 despite lower tractor volumes. It has achieved this through fighting back its lost market share, costs curtailment and superior product quality. As compared to its peers it continues to look attractive due to its higher operating margins and higher return on capital employed, hence it commands premium valuations and deservedly so.

Operating margins (%)3QFY003QFY01
Ashok Leyland8.19.8
Bajaj Auto14.96.5
Hero Honda13.013.8
TVS Suzuki10.57.8
Mahindra & Mahindra12.38.1
Punjab Tractors20.420.5

In the two-wheeler market, Hero Honda too is trading at a premium to its peers due to increase in market share through higher volume growth and higher margins. However, here the concern lies in Honda's 100% subsidiary, which has already started operations for manufacturing scooters and could start manufacturing motorcycles after a few years. Besides the higher competition expected in this segment over the next two years with the aggressive entry of Bajaj Auto, LML and Kinetic does also add to the concerns of the company.

In the commercial vehicles segment, Ashok Leyland's 3QFY01 performance too is creditable. Despite lower volumes the company's operating margins have improved due to cost controls and sale of higher margin defence and bus sales. Its interest costs too fell due to better working capital management by the company. The company has performed better than Telco due to its strong presence in the bus segment, which is more dependant on changes in pollution norms than the slowdown in the economy.

Tata Engineering (Telco), too has been attracting buying interest in the last couple of trading sessions, this is despite the company's mounting losses in the current financial year. The trigger to this is the likely hike of rail freight rates in the budget, which will give a boost to commercial vehicle demand. Further higher expected expenditure on infrastructure for building of roadways too has given a breather. Its car sales are likely to get a boost as the sector is expecting a cut in excise duty for passenger cars from 40% to 32%.

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