Automobiles: Speeding beyond control

It’s hard to justify valuations for many of the auto stocks given that volumes for most haven’t really improved

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.