Despite the negative hype that has surrounded the automobile sector for one year now and the subsequent impact on the scrips of these companies, the sector seems to have saved itself from a recession.True, the heavy commercial vehicle (HCV) segment has suffered, but that is so because the fleet operators had over-built truck and LCV capacities in anticipation of an industrial growth. And when that expected growth did not materialise, freight rates collapsed, given the excess existing capacity which in turn hit subsequent demand for trucks.
A look at the rest of the automobile sector - passenger cars and two-wheelers - presents a different picture. The demand appears slack in the passenger-car segment in relation to the large production capacities being commissioned cumulatively by all the manufacturers, with no signs of a recession.
The choices available to the consumer, who expects to be bombarded with some more models in the current year, has in many cases forced a deferral of purchases. Nonetheless,shares of these companies and their component suppliers have been battered like there is no tomorrow.
Despite putting up an equally good show, which has been in line with the two-wheeler manufacturers, a number of auto-component stocks have also suffered in the marketplace.
The previous year's annual reports of some of the two-wheeler component suppliers cautioned against a slowdown in the current year as fresh two-wheeler capacities have gone on stream and new models are being introduced at an increased pace.
The position could rapidly become like that of the passenger-car segment, with abundant choice available and purchases being deferred as a result.
Growth in the two-wheeler segment (motorcycles), which was close to 25 per cent, is likely to slow down to 20-22 per cent in the current year.
The over-hyped motorcycle stocks of Hero Honda and TVS Suzuki have been revalued and along with them scrips like Munjal Showa (which supplies shock absorbers to HHL) and the TVS Suzuki subsidiary andcomponent supplier, Lakshmi Auto Components have also been revalued.
While the downward revaluation of Hero Honda seems to have ended and the stock has recovered, the stock of Munjal Showa (MSL) has been hitting new 52-week lows. Even though MSL is still trading at a relatively high price-to-earnings (p/e) of 8 times, (considering that most non-MNC companies trade at p/es of below 5 times), the valuations seem to ignore the fact that MSL will closely track the future growth rates of its group company.
This has been the case in the past five years. While Hero Honda grew by 19 per cent compounded annually, Munjal Showa grew by 20 per cent and both companies have had a comparable return on capital of 23-24 per cent.
It seems as if there is a premium on HHL as it is considered inevitable that Honda of Japan will increase its stake in the company to 51 per cent, while Munjal Showa may simply remain an Indian vendor to Hero Honda.
The same comparison will hold true for Lakshmi Auto and TVS Suzuki as well.The two companies have reported identical growth rates in the last five years. TVS Suzuki logged a 32 per cent compound growth rate while Lakshmi Auto logged a 33 per cent compound growth rate.
The difference lies in the respective return on capital which has been a high of 31 per cent for TVS Suzuki while it has been 24 per cent for Lakshmi Auto, the only difference being that while Lakshmi Auto's return on capital employed (ROCE) has been increasing, that of TVS Suzuki has been declining for the last three years as the company has added significantly to its asset base in the last three years.
That may change, however, with Lakshmi Auto planning to issue rights shares, the second issue in two years, which is part of a larger fund-raising exercise in order to keep its manufacturing capacities in tune with those of TVS Suzuki. It will also serve to bring down its return on capital in the near future and will weigh heavily on future valuations.
This is a pertinent point because besides the disparity invaluations between group companies is the disparity in valuations between the two component companies as well. Obviously, an incredibly high earnings per share of Rs 21 for Munjal Showa (Rs 5.5 per share for Lakshmi Auto Components) is being discounted.
But while Lakshmi pays out 38 per cent just 14 per cent; and on valuation parameters, Lakshmi Auto appears undervalued while Munjal Showa does not. The fact that Lakshmi Auto Components has so far had a better return on capital and a better growth record seems to have been entirely ignored by the market.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
