AUTO STOCKS - LONG DRIVE ON A SCENIC ROUTE?
By Ruma Dubey
The market is literally booming today and this boom is being driven by the auto sector. Tata Motors is the largest gainer in the sector and on the Sensex too. It hit a 52-week high today at Rs.288. This is followed closely by Mahindra & Mahindra and Maruti. The rest, Ashok Leyland, Bajaj Auto, Hero and even the auto ancillaries are up in the green.
Tata Motors is the main engine driving the market today and the fuel is better-than-expected numbers for Q3FY12. Its consolidated net profit rose 40.47% at Rs 3405.55 crore
on 43.46% rise in net sales at Rs 45199.29 crore on a YoY. JLR sales during the quarter grew 37% to 86,322 units supported by overwhelming response to the recently launched 'Range Rover Evoque'. JLR accounts for 90% of the company’s profit and 70% of revenue. JLR sales surged 36.7% to 86,322 units, led by the Evoque that was launched in September 2011. China’s contribution to sales rose to 17.2% from 13.1% a year earlier and this made up for a slowdown in demand in Europe and North America.
On the other hand, M&M is up not only because of the optimistic sentiments in the sector but also due to reports coming in that for the first time in many years, market share of small cars in India have dipped below 50%. The surprise was that the SUV segment both Indian and imported, showed a growth of 32% in 2011, with demand going up three fold in the past year which according to Society of Indian Automobile Manufacturers. This means that despite the higher interest regime, higher fuel prices, and higher cost of SUVs, the market for SUVs is buoyant. Mahindra is the undisputed market leader in the SUV segment with a market share of 60.5%, largely based on successes of its brands like the Bolero, the Scorpio and the Xylo. Its new SUV, XUV500, which reopened sales bookings last month, has had over 25,000 applications from buyers for just 7,200 vehicles.
Maruti is up, again due to the current sentiments for the sector and it remains the undisputed market leader in the small car segment. Once the interest rates start coming down, given its ‘makeover’ of older models and new models ready on the launch pad, the feeling is that going ahead, things will look good for the company. In Feb 2012, it crossed the 1-crore units milestone of cumulative sales in the domestic market since it started selling cars 29 years back.
Auto sector is the flavor of the moment and thus one can come up with umpteen reasons as to why these stocks are up. And the moment moods turn around, there will be enough justifications for the fall. So best to look at the sector without having the overhang of a rise or a fall.
First and foremost, the feeling is that the rate cycle will start coming down soon and that is enough to spike up the demand. Yes, rates will come down but it may not happen as early as March. For now the market is focused only on this.
Secondly, when the moods turnaround, it is always the auto sector which first reflects the change. For now, the sentiment is positive so auto sector is up and vice versa when outlook gets dim.
But one has to look at other factors too. For Tata Motors, sustaining this margin of Q3 might be a tad difficult and it is JLR which will drive the company. Evoque was the prime reason for the good numbers but other models, especially Nano continue to show miserable performance. Infact its domestic performance was not good and like Tata Steel, this company too is now driven by Europe, USA and China. We could see the lower base effect working in favour of the company and at least for the next six months, we could see the growth momentum continuing.
M&M is on a strong wicket but the biggest overhang for the company right now is whether or not the Budget will announce a cost increase for diesel cars and what form it takes. It too exports, mainly to South Africa, and hopes to start export of XUV500 to Chile, Australia and some European countries.
For these two companies, even if the domestic demand remains sluggish, it is hoped that it would be more than made up for by the demand in the export market. With things slowly improving in the Western world, it is expected that demand will be robust and keep the companies going.
Thus buying into auto is not a bad idea but buy into companies which have a global presence and have the brand equity. These stocks are for the long term. Do not go by the day-to-day mood swings of the market; if today the moods are great, enjoy the moment, the feeling of overwhelming optimism.