Automobile Sector (updated - 05 July 2009)
In the last couple of months, it was only the market leaders in the auto space that were doing well. But the numbers for the month of June show that others companies, too, are seeing better momentum. Mahindra and Mahindra(M&M), for instance, has done brisk business in utility vehicles — up 40 per cent sequentially — driven by the Xylo, while the growth in tractors was astrong 41 per cent.
Tata Motors posted better sequential volumes for heavy, medium and light commercial vehicles indicating that more goods are being transported. In fact, the LCV segment actually grew a strong 16 per cent year-on-year. Maruti Suzuki’s volumes are up 9.5 per cent year-on-year (a month-on-month comparison is not possible because of a shutdown at the plant). And with volumes up 24 per cent year-on-year, Hero Honda continues its good run.
Over the past few years, much of the passenger car and two wheeler sales in the country have been driven by attractive pricing — excise duty cuts have allowed manufacturers to offer buyers a good deal. Since the economy, too, was on an upswing, it didn’t take too much to convince aspiring consumers to walk into showrooms. However, affordability today is somewhat lower, given the downturn and moreover, it’s unlikely that product prices can be brought down unless there are big cuts in excise duties.
The impact of the last cut in December last year is still being felt and so the automobile industry this year should grow by at least 7-8 per cent. But beyond that the economy would need to be in better shape for consumers to be comfortable with making big-ticket purchases. Nevertheless, Maruti’s performance indicates that there is demand and it could well turn in double-digit volume growth this year given that it is extending its reach in the rural markets. Its strong presence in the entry segment will help it gain over competitors. Hero Honda, too, will continue to leverage its rural reach and should post double digit growth.
However, truck makers Tata Motors and Ashok Leyland are yet to see a strong rebound in their segments. The BSE auto index has outperformed the market by a fairly wide margin since January, gaining 83 per cent to the Sensex’s 51 per cent. Hero Honda has gained 70 per cent, while M&M has risen 161 per cent and Maruti 92 per cent.
source - BS
Sector Specific - Automobiles
Automobile Sector (updated - 06 June 2009)
Less than a month back industry watchers were wondering whether Maruti Suzuki would be able to sustain 70,000 units a month and whether Hero Honda would manage to grow by 8 per cent this year. Of course, auto stocks were climbing back from their March 2009 lows but opinion was divided on whether an Ashok Leyland would see an increase in sales of commercial vehicles this year. There were analysts who downgraded stocks such as Bajaj Auto annd Ashok Leyland after the reults.
Defying fundamentals, the BSE automobiles index hit a 52 -week high on Friday to touch 4934. It’s true the rest of the market’s rallying too and rallying like there’s no tomorrow, but it’s hard to explain intra-day rises of 5 per cent for Tata Motors, after the stock has already risen more than 200 per cent from its 52-week low, when volumes aren’t even back to 2007-2008 levels. Even a rise of 3 per cent for Ashok Leyland and Mahindra and Mahindra are confounding given that recent volume numbers have been nothing to write home about, although there may have been some improvement in the past few months.
For sure, money is becoming cheaper and banks might just be willing open up the loan counters again. But it’s not as though the economy is headed for even a 7 per cent growth this year—the consensus is somewhere at 6.5 per cent---and so it’s not clear yet that demand for trucks or three wheelers will bounce back so sharply. In fact, Rajiv Bajaj said recently that he wasn’t sure consumer demand was really picking up that fast.
And Tata Motors’ Ravi Kant too was circumspect when talking of the prospects for CVs this year saying the demand for the heavier trucks was still quite weak. Yes, Hero Honda has been doing brisk business but much of it is in the rural markets where consumers haven’t felt the pinch as much as their city cousins have. Also, it’s the smaller 100 cc bikes that comprise the bulk of Hero Honda’s sales. though that really matt`een re-rated and the company is growing sales. Maruti’s valuations at around 17.5 times forward earnings too can’t really be justified even if one believes that that macroeconomic recovery is round the corner. Also, subdued consolidated earnings for Tata Motors, courtesy possible losses at JLR, mean that the stock is clearly overpriced Rs 386---stand-alone earnings are expected to come in at around Rs12-13 per share, this year. Ashok Leyland trades at around 20 times forward earnings and doesn’t deserve a multiple higher than 13-14 times at best. As for Bajaj Auto, it’s much too soon for the stock to get re-rated and the multiple of 17 times estimated 2009-10 earnings that it currently commands seems overdone.
source - BS
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