Stay the Course with Equities. Volatility isn’t the Time to Sell.
Auto index constituted by NSE and titled CNX auto, included companies producing two wheelers, three wheelers light commercial vehicles, heavy commercial vehicles in addition to battery manufacturers, tyre manufacturers and auto ancillaries. Our study this week is to assess the current situation and attempt to foresee the likely trend in CNX auto along with individual positioning of companies.
With country’s GDP set to be tepid for some time to come, the demand for automobiles is not expected to be robust and hence one would expect the sector to be a dampener. Since this sector involves a high capital investment, the intrinsic value of the business remains and offers a good investment opportunity at lower levels. From 1 August 2013 till 13 December 2013 CNX auto has seen an increase of 17.62%. While most of the companies represented by this index have gained in the meantime, some companies have seen their prices seek lower levels. Out of 15 companies covered by this index, five companies have appreciated by more than 30% in this period while another four have appreciated by more than 20%. Only three companies have lost some of their value and three companies made between 0 to 20%.
|
Price Changes |
Number Of Companies |
|
-0.01 % to -9.99 |
3 |
|
0 % to 9.99 |
1 |
|
10 % to 19.99 |
2 |
|
20 % to 29.99 |
4 |
|
30 % to 49.99 |
4 |
|
50 % and more |
1 |
When prices fall too far below historic price-earnings ratio, the built-in business value of companies will come into reckoning and investments start flowing into the sector. Reflecting this very trend CNX auto index has bounced back in the last few months. This has happened when a slight hint emerged from the workings of the auto companies that the operations could turn profitable in days to come.
Among the two wheeler manufacturers TVS motors is not included in the index though Hero and Bajaj auto are included. Bajaj auto’s profit hardly improved by 5% in the last 18 months and the Price of the stock fell by 1.48%. Hero motor has seen its profits slide down but by announcing new launches of vehicles and backed by renewed hopes of increasing demand following a very good monsoon this year, this company attracted some investments pushing its prices up by 13.54%. Going forward, the prospects of share price rise for both these companies do not appear brighter in the absence of increased profitability. TVS motors has reported a turnaround performance and is likely to attract bulk of the investment in the next quarter.
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In light commercial vehicle segment, Maruti Suzuki has announced stellar performance in its operations and investors in general have recognised its performance and rewarded the share with an increase of 26.06% in the last 18 months. Mahindra and Mahindra could not match Maruti’s performance and stood a distant second by seeing its profits rise marginally. Consequently this share price has shot up only by 9%. Going forward, unless the economy improves and fortunes change for the light commercial vehicle segment, the prices of stocks may be checked and only a modest rise can be anticipated.
In heavy commercial vehicle segment, Tata motors which also manufactures light commercial vehicles managed to halt its sliding bottom line and turned around in the last quarter. Price of the stock has shot up by 28.17% to reach a level of 370.35 by end of November from a level of Rs. 288.95. Ashok Leyland’s profitability suffered heavily in the last 18 months. Thanks to the bullish sentiment in auto segment, this stock has surprised many by rising 27.45% in the last 18 months. Going forward Tata motors, with a wide product basket maybe able to sustain its profits while the fortunes of Ashok Leyland look dim.
CNX Auto’s upward march was fuelled by stocks outside automobile manufacturing sector. Two wheelers, light commercial vehicles or commercial vehicles have not been the chief reason for increased levels of CNX auto index. The top three performance in CNX auto index were from industries that support auto mobile manufacturing. Bharat Forge continued to disappoint in operations but it’s stock has been very well sought after in the last 18 months. Apparently this interest was generated because of the meltdown in its price in the year 2013 than any turnaround performance in the company.
As opposed to this, Amara Raja batteries and MRF have reported extremely encouraging results and saw their prices surge. While Bharat Forge has seen a 56.06% improvement in its share price, MRF and Amara Raja batteries have gone up by 48.76% and 44.31% respectively. Eicher Motors too appreciated by over 40% in the period. However, all these companies are trading at their fair prices or above their fair prices leaving very little room for further appreciation, unless they beat and improve their own performance in 2013 December quarter.
Vivekam strongly recommends investments into Tata Motors and TVS motors from this basket and advise caution on all other stocks. As always, Vivekam will review it’s stand once 201312 quarter results are announced by companies.
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