Margins under pressure, auto stocks perform poorly on BSE

Margins under pressure, auto stocks perform poorly on BSE

Auto company stocks are among the worst performing this year as investors and fund managers have stayed away because of declining sales of automobiles and increasing pressure on profit margins. Analysts say the sector could continue to be a laggard for another 3-6 months.

Since the beginning of 2007, the Bombay Stock Exchange’s auto index has declined 27.61%, the worst among eleven such sectoral indices. This compares with a 1.57% rise of the benchmark 30-stock index, the Sensex, which closed on Thursday at 14,163.98, nearly 85 points down from its previous close.

All four auto stocks in the Sensex are in the list of 10 worst performers among index constituents with Mahindra & Mahindra Ltd, leading that pack—the company’s market capitalization has almost halved since January to Rs15,331.3 crore. Mahindra’s scrip closed at Rs624.95, down Rs5.4 from the previous close.

“The auto pack is suffering from declining volumes," said K. K. Mital, fund manager with Escorts Assert Management Co. Ltd. “(In) The next 3-6 months (they) will still remain under pressure." Mital and other fund managers say they have moved money away from auto stocks into other sectors such as capital goods and telecom.

Sales of automobiles in India’s 10-million-units-a-year market have declined 6% this financial year as higher lending rates force prospective buyers to avoid or postpone purchases.

As much as 60% of motorcycle and 85% of passenger car purchases are financed by banks or financiers.

Lending rates have increased by as much as 4 percentage points in the past six months as the central bank tightened the money supply to control rising inflation.

“Margins are under pressure for all companies, with costs of raw materials such as steel and aluminium rising," said Manish Sonthalia, vice-president (equity strategy) for Motilal Oswal Securities.

The price of cold-rolled steel coils, the most widely used for making automobiles, had increased to Rs40,500 per tonne in May, up 26% from a year ago, according to latest available data from a government arm, the Joint Plant Committee. This has squeezed the operating margins of auto companies by as much as 300 basis points. For the fiscal year ended 31 March, TVS Motor Co. Ltd, India’s third largest two-wheeler company, reported a 3.05 percentage point decrease in operating margin to 5.46%.

Still, analysts such as Sonthalia believe that the sector is a good bet for long-term investors. “Valuations are attractive, If someone is willing to hold on, it will be positive," he said.

An economy that expanded by 9.4% last year and is expected to grow at over 8% this year has boosted the demand for vehicles in Asia’s fourth largest automobile market.

This is expected to drive sales further to 3 million passenger cars a year by 2015 and 10 million two-wheelers a year by 2012, according to estimates by industry and economic think tanks.