The S&P BSE Auto Index has rallied 11.55% in the last 3 months outperforming the S&P BSE Sensex by 1%. It would be interesting to take a look at how the industry players have delivered on the sales numbers for the month of June 2016 and what are the kind of valuations that they command in the present scenario. The current valuations suggest that the market is giving higher PE multiple to companies with relatively better growth but increased expectations due to implementation of the Seventh Pay Commission and healthy monsoons can trigger the laggards to new levels delivering better than expected returns to investors.
The country’s largest car manufacturer Maurti Suzuki reported a decline of 13.9% in the number of cars sold to 98,840 units as compared to 114,756 units sold in the month of June 2016. The company reported domestic sales of 92,133 units and exports of 6,707 in June 2016 as against 102,626 and 12,130, respectively, in June 2015.The production in the month of June 2016 was affected due to fire at Subros which is a key vendor for the Company which manufactures automotive air-conditioning systems.
Madhindra & Mahindra (M&M) reported a growth of 8% in the number of vehicles sold to 39,011 units in June 2016 compared to 36,134 units sold in the month of June 2015. Passenger vehicles segment encompassing utility vehicles, cars and vans accounted for sales of 17,070 units, commercial vehicles 13,540 units, three wheelers 4,381 units and exports 4,020 units, rising by 41% from 2,852 units in June 2015. The Company reported an overall growth of 11% in the number of units sold during the first quarter of the financial year 2016-17.
Mahindra and Mahindra and Maruti Suzuki are the only listed companies in India in the Passenger Vehicle segment of the Automobile industry with current price to earnings multiple of 38.58 and 26.62 respectively. M&M appears to be on the expensive side but Maruti Suzuki appears to be inexpensive relatively. Both the companies have a lot of potential in terms of the expected growth as implementation of the Seventh Pay Commission to the Central Government employees would increase sales of Passenger vehicles. Maruti Suzuki is expected to clock higher growth as compared to M&M due to its broad based product portfolio of small cars. When the 6th Pay Commission was implemented the sales growth recorded in the next year was in the range of 24% to 26% for Maruti Suzuki. The stock appears to be inexpensive for the growth expected in the long term.
Mahindra and Mahindra would continue to post the same kind of growth if the monsoon turns out to be normal in the current season, as majority of its sales are derived from the rural areas where it sells tractors and Utility vehicles.
The largest two wheeler manufacturer HeroMoto Corp reported a growth of 1.3% in the number of vehicles sold to 549,533 units in June 2016 as compared to 542,362 units sold in June 2015.
TVS Motor Company reported a growth of 11% during the month of June 2016, with total sales of 247,085 units in June 2016 as compared to 222,017 units in June 2015. Motorcycle sales rose 7.6% to 95,465 units in June as compared to 88,690 units in the same month a year ago. Scooter sales surged 10.3% to 67,539 units from 61,215 units in the same month a year ago.
Bajaj Auto reported 4% decline in total sales in June at 3,16,969 units against 3,31,317 in the same month of 2015. Motorcycle sales during the month fell 5 per cent to 2,73,298 units from 2,87,582 in June last year. Bajaj Auto’s commercial vehicles sales during the month remained flat at 43,671 units compared with 43,735 in the year-ago period. Exports in June this year were at 1,23,252 units against 1,56,074 a year earlier down 21%.
Bajaj Auto and HeroMoto Corp in the two wheeler segment of the Automobile industry command a price to earnings multiple of 19.96 and 20.03 respectively. The stocks appear to be relatively cheap as sales growth has not yet picked up for these players. Healthy monsoon rains would revive the scenario for HeroMoto Corp as it commands the largest market share in the rural areas. Bajaj Auto primarily sells in the urban and export markets where sales in the month of June 2016 have declined putting a question mark on the recovery in the near future.
TVS Motors trades expensively at a PE ratio of 39 as the growth from the Scooter and the motorcycle segment is much higher than that of the other two companies. The stock has however corrected 11% to Rs.300 in the current scenario because of slowdown in sales as compared to previous periods.
In the commercial vehicles segment Ashok Leyland reported a growth of 7% in the number of vehicles sold to 11,108 units in June 2016 as against 10,429 units in June 2015.
Tata Motors has registered an 8% growth by selling 44,276 units against 40,869 units on yearly basis, supported by passenger and light commercial vehicles sales. Domestic sales grew by 8% to 38,673 units and exports rose by 11% to 5,603 units compared with year-ago period. Light commercial vehicle sales increased 14% while medium & heavy commercial vehicle sales declined 11% year on year. Passenger cars sales jumped 37% to 11,705 units in June 2016 over June 2015 as hatchback sales grew by over 100% at 7,126 units due to strong demand for the recently launched Tiago.
Ashok Leyland and Tata Motors trade at a price to earnings multiple of 25 and 14 respectively. Commercial vehicle segment of the Automobile industry is well on track with sustained recovery in the Medium and Heavy Commercial Vehicle segment reporting double digit growth in the month of May 2016. The numbers for June indicate overall growth in the range of 7% to 8% for Ashok Leyland and Tata Motors respectively. Tata Motors has corrected from levels of Rs.489 due to Brexit issues as JLR is expected to get impacted by UK’s decision to leave the European Union. Sustained recovery in the number of vehicles sold for Tata Motors in the Commercial vehicle space could help negate the impact from JLR in the time to come. If the growth in the Passenger vehicles sustains in the next few months it can propel the stock beyond the 52 week high of Rs.490.
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