Saturday, September 09, 2006
Market Matrix – Indian Auto Scene and trends in valuation – 9 Sep 2006
By krsna Khandelwal – A Stock Market Vedic Theory proponent
There has lately been an upsurge in auto equities on account of two factors , namely, the drop in oil prices and the other on account of robust sales performance by all the segments of automobiles and two/three wheelers. While the high sale figures suggest that India is now riding on the back of a very resilient economy and it has developed a sort of immunity towards the world oil prices. This immunity may be due to the reluctance of the govt in reflecting the real pricing for the petroleum products in retail. Although this is some thing that would be despised by the reformists but some how this very practice has given stability to the nations’ economy from the frequent jerks that it would have felt on account of completely free pricing mechanism. The policy of restricted increase in oil products prices would have damaged the economy in the end had the crude oil prices not moderated and would have continued their journey upwards. Now, it is the time for the policy makers to adopt a sound policy in this regard. In my opinion, the best thing to do is to have the past one-year moving average of the international crude prices as the benchmark price based on which the retail prices should be worked out. This would on one hand smoothen the retail prices in respect of advances/declines and on the other hand not hurt the auto industry unduly because of the factors not in its direct control. This would also not take away the incentive to search for the alternative fuel sources every now and then.
We have now to take in to account the stock market related matters for the auto sector. In my humble opinion, the auto scrips have been priced too optimistically and retention at this level of pricing does not seem possible. The discounting of auto scrip should now be more cautious rather than more liberal. We do know that auto industry has been able to reduce the production cost due to the higher volumes and due to their ability to dictate terms of supply of components and original equipment viz a viz the auto component manufacturers. This advantage may not last for long as the profitability of the component manufacturers has been very strained and they have not had the benefit of increasing sales volumes. I think with their demonstrated capacity to be able to supply to the world at large the components of world standards in quality, the day is not far when they would demand their rightful share in the auto boom currently being witnessed. Since the end product price may not be raised due to consumer resistance I think the brunt of the sharing of profits equitably will have to be borne by the manufactures of cars, trucks, tractors and two/three wheelers, all of whom have had a undreamt streak of good fortune even in the face of historically high crude oil prices, due to the factors enunciated above.
In light of what I have explained , the prudence demands that love for auto assemblers’ scrip is diluted to the level of love for equities in general that is to say that they should be subjected to discounting at the level of PE which the Nifty and Sensex stocks command at the moment and not beyond. For the purpose of record, I may mention that the major indices are at the PE level of around 20(Nifty closed at 3471 and sensex at 11918).
The expectations in market have to be adjusted in light of US economy suffering from slow down fears and Bank of Japan possibly raising the interest rates. Therefore, in India we should maintain a cautious optimism.