Growth prospects drive up auto stocks

Booming agri income seen raising demand

After a brief lull when the markets set their sights on index stocks, the attention is back to the old favourites "" automobile and automobile ancillary stocks.

Apart from a clutch of Indian companies bagging prestigious overseas orders and conquering new geographies, what has sparked interest in the latest round in these stocks is the strong domestic growth projections.

The reasoning is that with agricultural incomes booming following two bountiful monsoons, and the domestic gross domestic product growth at eight-nine per cent, there will be a strong demand for consumer goods, most notably in the automobile sector.

As a consequence, domestic and foreign portfolio investors have stepped up buying activity in the sector, in anticipation of strong growth numbers for many companies in the next two quarters.

This is evident in the way most automobile stocks have appreciated in the last three months. The stock price of two-wheeler major Hero Honda is back in the limelight, posting nearly a 17 per cent gain in the last seven trading sessions.

Similarly, Maruti Udyog, Tata Motors, and TVS have appreciated in the range of 5-11 per cent in the last one week.

In four months, these scrips have appreciated by a minimum of 27 per cent. Hero Honda has appreciated by 174 per cent from Rs 180.10 on August 12, 2003, to Rs 500 on February 13, 2004.

Kalpesh Parekh, analyst with ASK Raymond James, said: "The automobile sector is witnessing a cyclical change with the domestic commercial vehicles industry growing annually by over 30 per cent, while the two-wheeler segment is growing by 15-18 per cent. With exports also growing strongly, the sector is likely to post good numbers for the next two quarters, after which the outcome of the monsoon will be crucial."

Auto sector analysts attribute the turnaround in the fortunes of most companies to improved domestic and export growth and heavy cost cutting measures by these companies in the last two years.

Pramod Amte, auto sector analyst with Prabuhdas Lilladher, said: "The demand scenario is looking good with the economy booming and with a favourable interest rate regime most auto companies are expected to benefit. Even at the current price levels, a few auto stocks still look attractive in terms of price earnings multiples."

Going forward, the two-wheeler industry sales are expected to continue at a strong pace, given that financing continues to be easy and interest rates continue to be low.

Hero Honda, at the current levels, is trading at a price earning ratio of 11 which is extremely attractive, Pramod said.

A research head with a domestic broking firm said the cut in import duties for inputs should relieve both the two-wheeler and car manufacturers. And with strong domestic demand, the sector is likely to outperform the market.

Most companies have managed to scale down their costs considerably with a reduction in debt and better utilisation of technology to control raw material costs, he added.

A likely cut in prices of metal inputs, following the reduction in import duties, will ease cost pressures on two-wheeler and four-wheeler manufacturers.

Thus, the manufacturers will be able to maintain prices to feed the already strong domestic demand growth. At the same time, there is no threat of cheaper imports of two-wheelers as Indian companies are already one of the lowest cost producers and Chinese bikes have failed to make a mark in the Indian market.