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| A reasonable buying opportunity |
| Devangshu Datta / New Delhi Apr 27, 2010, 00:56 IST |
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The automobile industry is a classically cyclical one with vehicle sales tied to economic growth. The industry also has a complex value chain that links the fortunes of manufacturing and service segments.
In India, the 21st century saw a couple of key changes that helped it take off.
Retail vehicle loans became much easier to obtain and per capita crossed a threshold, which created a decent-sized market for vehicles. Also, more and more global majors started locating manufacturing hubs in India and created a huge opportunity for ancillary industries.
The auto cycle seems to be leading the overall economy slightly. If we look at domestic vehicle sales (cars, commercial vehicles, two- & three-wheelers combined), they grew from just over 6.8 million units in 2003-04 to 10.1 million in 2006-7, a compounded average growth rate of over 14 per cent .
That boom started while the economy was still in recession. It peaked before the macro economy slowed. In 2007-08 and 2008-09, sales dropped to around 9.6 million, and then stagnated.
The slowdown was most evident in commercial vehicle (CV) and two- and three-wheeler sales, which declined. Passenger four-wheeler sales grew slightly.
Last financial year (2009-10) saw sales rise across categories to all-time highs. A total of 12.3 million units were sold, up from 9.7 million in 2008-09. Again, this seems to be leading the overall economic recovery somewhat.
It’s reasonable to expect sales to grow for a couple of years since the macro economy is strengthening. SIAM (Society of Indian Auto Manufacturers), which provided the above data, expects 10-15 per cent growth across segments in 2010-11.
Translating these numbers into earnings and by extension into equity returns is a complex exercise. Several majors are unlisted.
However, for listed majors, price appreciation in the last boom cycle topped out between January 2007 and October 2007, which broadly coincides with the pattern of growth-decline-stagnation.
Stock prices started rising again in Q1, 2009-10, which again roughly coincides with the northward move of the sales graph. The segment has delivered outstanding returns since 2003, despite being hit by the recession.
Most auto stocks beat the Nifty by a handsome margin. Right now, the industry seems to present a reasonable buying opportunity.
It’ll be really attractive if there’s a market-wide correction in the next few weeks.
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