AMFI Registered Mutual Fund Distributor | SEBI registered Investment Adviser
FSM LOGO

                    


titl_l_gif
Funds and Personal Finance
title_r_gif
Share | Email Print more
Auto sector: Driving in surplus
March 3, 2010

This article does a short round up of the auto sector, one of the best performing sectors of 2009 with an outlook from JM Mutual Fund.


Author : Dhanashri Rane



Untitled Document

Key Points from the JM Mutual Fund interview

  • The auto industry’s sales grew at 24.3% during the period from April 2009 to January 2010
  • The two-wheeler, passenger car and commercial vehicle segments witnessed a healthy growth
  • US and European markets are showing signs of stability which should benefit auto ancillary companies supplying components to these markets
  • Key risks: Increase in commodity prices and hike in interest rates

In the last couple of decades the majority of auto-makers, particularly US companies have underperformed relative to the markets.  However, the Auto sector in India sprung a major surprise in 2009, owing to cheaper loans, affordable and bright new models, and the stimulus package ably supported by a rise in the aspirations of both the urban and rural upper middle class.

In fact, January 2010 could be called the harvest season for auto makers. As per Society of Indian Automobile Manufacturers (SIAM), the month of January witnessed a total of 11, 14, 157 vehicle sales and 145,905 car sales; the highest number of units sold in the domestic market.

In addition, the BSE Auto Index hit an all-time high of 7669.49 points on 5 January 2010.  The performance of sectoral indices (Table 1) shows that auto is among the best performing sectors in 2009 second only to metals, but the Year-Till-Date (YTD) performance hasn’t been encouraging. In this article, we speak to JM Mutual Fund to understand the drivers and key risks for the sector.

 

Absolute Returns (%)

Sectoral Indices

1 month

3 months

6 months

9 months

1 Year

YTD

BSE Metal Index

-7.46

-1.24

26.96

64.41

249.36

-7.96

BSE Auto Index

-7.46

-2.92

20.20

56.44

169.05

-7.88

BSE Information Technology Index

-0.56

6.35

27.23

82.36

153.51

-0.50

BSE Consumer Durables Index

2.11

12.24

25.24

57.80

151.15

4.54

BSE Bankex

-2.31

-6.79

13.47

22.44

126.01

-4.46

BSE Capital Goods Index

-1.18

-2.00

1.95

18.52

122.23

-6.74

BSE Realty Index

-15.00

-16.52

-21.46

-3.56

119.76

-17.19

BSE Healthcare Index

-0.56

1.43

26.30

43.02

87.03

-3.75

BSE PSU Index

-6.53

-0.47

10.01

18.97

85.19

-4.19

BSE TECk Index

-3.90

3.89

6.56

28.22

84.80

-3.39

BSE Power Index

-4.50

-1.75

-0.04

7.96

71.44

-7.34

BSE Oil & Gas Index

-4.80

-7.37

-0.65

-2.24

59.23

-8.38

BSE FMCG Index

-0.94

-4.88

4.86

31.99

36.43

-1.63

source: HDFC Mutual Fund, 24 February 2010

Impact of stimulus

On account of the global credit crisis, the consumer sentiment was affected negatively, thereby hampering the demand severely in 2008. In addition, high interest rates and poor liquidity in the system led to a drop in sales, thus impacting the profitability of companies.

However, the sector showed huge improvement in earnings reported for the first three quarters of FY 2009-2010, mainly following the low base of previous year.

Table 1 shows the economic measures taken by governments worldwide and the stimulus money directed towards the auto industry. The slowdown in the economy prompted the Indian government to announce three stimulus packages to give a fillip to the overall industry. The fall in prices as a result of the cut in Central Value-added Tax and reduced excise duty rates helped trigger demand for automobiles.

 

Location

No. of cars produced per 1000 population

Value of stimulus package (in US$ billions)

Value pertaining to Auto sector in the stimulus package (in US$ billions)

Canada

574

32

3.28

US

450

1678

23.4

Argentina

163

3.9

1

Brazil

110

100

5.3

Mexico

156

54

6.48

Australia

575

34

4

China

25.4

586

1.5

India

11.4

8

Tax cuts

Japan

491

421

-

Korea

207

141

Tax cuts

South-East Asia

176

33.9

-

Germany

549

62.5

2.3

France

503

48

1.32

Italy

567

103

2.56

Russia

222

220

-

Spain

499

14.3

1.02

UK

506

34.5

3.29

source: Deloitte

Nevertheless, the number of cars produced per 1000 people in India is still way behind other BRIC countries i.e., Brazil, Russia and China.  Despite this, India is the eleventh largest passenger car market, the second largest two-wheeler market and fourth largest commercial vehicle market in the world.

Chart 1 shows the steady increase in exports, the two-wheeler segment especially has shown impressive growth. The One-lakh Rupee People’s Car, Nano made a grand entry on roads in 2009 establishing India’s potential to be the global small car manufacturing hub. This is also where great potential is waiting to be tapped by auto-makers.

Budget 2010

Though the central excise duty was hiked by 2%, this move was widely anticipated by the market. The surplus due to increased tax limits should help consumer spending and maintain demand despite the partial rollback of the fiscal stimulus.

 

source: SIAM

According to a report by Dun & Bradstreet on Union Budget 2010-11, “The focus on infrastructure development is expected to indirectly give a boost to demand for commercial goods carriers, while the focus on rural development is likely to push up demand for two-wheelers in the rural markets. The report also states, “The exemption from basic customs duty and special additional duty for some critical parts/ sub-assemblies of electric vehicles is expected to bring down production costs for the vehicle manufacturers. The interest subvention of 2% on pre-shipment export credit is expected to benefit auto component manufacturers in the small and medium enterprises segment.”

The implementation of the Goods and Services Tax next year will benefit the sector. The reason being that then the excise, value-added tax, central sales tax will come under a single tax regime thereby bringing in efficiency.

JM Mutual Fund Outlook

Auto sector in India is showing rapid signs of improvement. The demand from domestic Original Equipment Manufacturers (OEM) i.e., the two-wheeler, passenger car and commercial vehicle segment witnessed a healthy growth during the period from Apr 2009 to Jan 2010 and the industry sales grew at 24.3%. Commercial vehicles witnessed recovery with 30.4% Y-o-Y growth with two consecutive quarters of growth. All other segments, especially consumer driven segments, witnessed robust momentum in demand at retail level and exports. While two-wheelers grew by 23.7% Y-o-Y, three-wheelers grew by 25.7% and passenger vehicles grew by 25.1% Y-o-Y. Internationally, US and European OEM markets are showing signs of stability which should benefit auto ancillary companies supplying components to these markets.

There are however two caveats as follows:

  • Commodity prices have started hardening over the last few quarters which could lead to some amount of pressure on the margins. However, some of it would be negated due to the economies of scale and operating leverage
  • Short term developments in terms of excise duty cut rollback and hardening of interest rates

iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


Comments (0) | Comment on this Article
 (Click on Comments/Comment on this Article to show or hide comments/post a comment)
USEFUL LINKS
Recommended Funds
Recommended Portfolios
Chart Centre
Risk Profiler