Skidding to a halt

SMARTSHARE

There are several reasons why auto stocks are going out of favour. One is rising oil prices. Another is rising input costs. A third is rising interest rates. A fourth is implementation of Bharat Stage III emission norms. So it's not surprising auto shares have started under-performing the market.

In 2004-05, the industry had a pretty good year. Tata Motors in particular registered a stellar performance in terms of sales growth. The last quarter sales numbers are just in and it appears that the Tatas are maintaining their dominance in the commercial vehicles (CV) segment and posing a challenge to Maruti in the passenger segment.

In FY 2004-05, Tata Motors recorded 27 per cent growth in unit sales across all segments, selling a total of 3.99 lakh vehicles (from 3.14 units in 2003-04).

The Indica crossed the 1 lakh mark, hitting 1.05 lakh units and producing the lion's share of total passenger sales of 1.79 lakh units. In commercial vehicles, the company sold 1.90 lakh units in the domestic market (1.52 lakh in 2003-04). Exports in the 2004-05 fiscal rose 38 per cent to 30,496 units (22,046 units in 2003-04).

Exports are likely to be a thrust area in 2005-06 as the Tatas are trying to expand overseas. Tata Motors is in talks to set up an assembly plant to assemble pickup trucks in Thailand.

The company is negotiating with Thailand's Board of Investment to get tax breaks and hopes to take advantage of a bilateral agreement that cuts import tariffs on auto parts to 5 per cent. That would add to the Far Eastern presence of the Mumbai major. It already has a toehold in the region with its $118 million acquisition of Daewoo Commercial Vehicle Corp.

The overseas expansions could balance out pessimistic expectations of lower domestic growth in 2005-06. There are clear signs of a slowdown in CV growth at least. In Q4, CV growth was pegged at 13.75 per cent, which is much lower than the 30.5 per cent recorded in the first nine months.

February was a particularly bad month "" CV sales grew only by 5.5 per cent compared to February 2004. Overall, CV growth for the fiscal was about 25 per cent. Even in the passenger segment, Q4 growth was lower (though still healthy) at 32 per cent versus the 35 per cent recorded between April-December.

This is in unit terms. Realisations in value terms are expected to be quite a bit lower than the unit gains. Metal prices have gone through the roof in the last fiscal and profit margins have been squeezed as a result.

EPS growth for the full year is unlikely to be higher than 20 per cent, which means that EPS will probably rise to about Rs 27-28 from the 2003-04 EPS of Rs 22.96. Assuming 20 per cent EPS growth, at the current price of Rs 420-odd, Tata Motors is available for about 15 times its 2004-05 PE.

Between April 2003-January 2005, the stock displayed classic cyclical boom behaviour. The share price moved from Rs 150 to Rs 525 (with a high of Rs 570 in February 2004) while the trailing PE rose from 16 (April 2003) to 23 (January 2005). Since January 2005, the share price has dropped 20 per cent. The cycle may have peaked.