Company Profile: Ashok Leyland

Company Profile

Ashok Leyland is the 2^nd largest commercial vehicle manufacturer in India, and offers wide range of carriers across all sizes. It is the flagship company of the Hinduja group. Earlier it was limited to the southern markets, but over the past few years has widened its network. It’s the best pure play on the commercial vehicles segment in the country.

40% of the company is owned by the promoters and around 14-15% by FIIs.

Segmentation

Ashok Leyland is a core CV player, and it benefits from higher industrial activities. During business cycles, the volatility in sales for CV is higher than that of passenger vehicles. It has started exporting to a few of the neighboring countries – Sri Lanka, Bangladesh, Middle East. Overall, about 10% of the sales come from exports.

On an overall basis, AL manufactures 60k-80k vehicles annually. The new plant at Uttarakhand is expected to produce 20,000 units from 2010.

For 2010, EPS is INR 3, and stock is trading very rich to its historical valuations.

Company Profile: TVS Motors

Company Profile

TVS Motors is one of the smaller players in the 2W (and 3W) segment, and market leader in mopeds. Its key products are Apache, Star, Jive, Flame (all motorclycles), Scooty, and XL Super (moped). As a part of its plan to tap the overseas market, it has commissioned a plant in Indonesia.

It is part of the Sundaram Group, and current MD Venu Srinivasan holds 61% of the company. 7% shares are held by FIIs, and rest is held domestically.

Segmentation

Bulk of the sales for the company comes from the motorcycle segment (which is the largest segment as well). In addition, the company is fairly big in mopeds as well. Motorcycles and Mopeds each contribute roughly 40% of the overall sales (in units). Rest is made up by scooters and 3-wheelers.

The company is focusing on exports going ahead, and has a plant in Indonesia.

Financials

Its product mix is inferior to the top players, and it is present in a lot of low-margin segments (scooters as well as mopeds make up 50% of its total volume). As a result, its operating margins are lower than the industry, EBITDA levels as 7-8% (as against 15% for the top players).

The company has a core EPS of INR 2.5, and is trading at PE of 30. Its balance sheet is much smaller than HH and Bajaj, and it also lacks the resources to counter the competition.

Company Profile: Bajaj Auto

Company Profile

Bajaj Auto is the 2^nd largest 2-wheeler company in India, and has a diversified product portfolio. In addition to catering to the local markets, exports are also a good chunk of the overall volumes.

Bajaj is India’s largest exporter of 2W and 3W vehicles, and it currently exports to Africa, Latin America and Asian markets. Currently it is exporting 25% of its overall sales.

In 2008, the earlier combined entity was split up between the brothers, and Bajaj Auto was formed. It is being headed by Rajiv Bajaj – who owns 49% of the company. Another 20% is owned by FIIs, and rest is held domestically.

Segmentation

Bajaj remains a market leader in the premium segment of motorcycles, with its Pulsar being the highest selling bike in the segment. Also, it has Discover catering to the largest segment (deluxe), and Platina in the entry level segment. Over the years, Bajaj has rationalized its offering, and now has a much leaner product portfolio.

The company was a dominant player in the scooter business, but it has now exited the business (as it had become unprofitable).

In the 3W segment, company is a market leader, and currently ~10% of the sales are derived from this segment.

Financials

Bajaj Auto is expected to exceed the industry growth rate in the coming years, and is expected to grow sales at 17-18% in coming years.

On an average, it is expected to sell over 4M vehicles in 2011 (60% in domestic 2W segment, 30% in exports, and 10% in 3W). EPS for 2010 is INR 60, and company is trading at a PE of 25.

Company Profile: Hero Honda

Company Profile

Hero Honda is India’s largest 2W manufacturer, with strong brand value and dealer network. Over the years, it has generated higher than industry growth rates in the segment. Hero Honda has the most widespread network, and has good rural reach as well. Among all the players, it has the highest rural reach, one of the reasons why it was insulated in the crisis (not much financing based sales in rural areas, mostly cash sales).

It’s a joint venture between Honda Corp Japan and Munjal Family (each of them owning 26%) that began in 1984. It has 3 production sites – Gurgaon, Dharuhera and Haridwar, and together they have a capacity of 5.2 million vehicles per year.

Segmentation

Hero Honda has a tight grip over the deluxe (middle) segment of the market. Its 3 largest selling motorcycle are Splendor, Passion and CD Deluxe. Exports are still a small proportion of overall sales – with company exporting 100k vehicles last year. This compares with the overall sales figure of 4 million.

Financials

Industry long term volume growth rate has been 12-14%, whereas the same for Hero Honda has been 15-16%. Industry growth rate is expected to spike up in future, and expected to be in 18-19% range over the next few years.

On an average Hero Honda has been selling more than a million vehicles per quarter. On a per month basis, it has been exceeding 400k mark for a few months now. EBITDA margins are 15-18% for the company, and bulk of the cost is input raw materials cost. PAT margin is 12-14%.

EPS for 2010 is INR 110, and company has a good dividend yield of 2%. And company doesn’t have any debt on the books, with good free cash flows.

Market View: Debt Trap

I will be changing the format of posts slightly - and instead of putting up the views, will rather put some facts and information. And based on them, would try to get the scenarios done. This would help put things into a better perspective, and also throw up likely if-else scenarios. Quite often, when the view goes wrong, I'm caught clueless about 'what to do now'. 


The easiest way of starting this framework would be to state the simplest fact about the markets today - everyone is borrowing. Companies are raising equity as well as bonds (and all the fancy things that fall in between). Countries are raising debt from other countries, as well as their own citizens. Very soon, we would have a world with very high leverage, and very high debt servicing costs. Developed world is borrowing to maintain its consumption levels, whereas the developing countries are borrowing to spend on infrastructure and create capacity. 


So, what will happen from here?


1. Banks would be the out-performers: More borrowings means more business. A world with a higher debt to GDP ratio also implies very high activity levels for the banks. Credit growth would be humongous, and margins would expand as well. 


2. Companies with large free cash flows would do well: All the tech and IT companies with zero to little debt on the books would be best placed to ride over the situation. However, they would have to do with lower returns on their portfolio as long as rates are kept low. Telecom would have fallen under this category, but for the 3G auctions (and subsequent debt on the books of each of the operators). 


3. All the companies with large capital requirements and long term projects would suffer: Capital goods and real estate being the top 2 sectors. At some point, interest servicing would rise to very high levels, and any fall in business activity would squeeze them. They might do well if global economy recovers, but if there is any slowdown, they would bleed badly. 


4. ...


P.S. - Now I can slightly appreciate the consumerism in US and other developed economies. Irrespective of what the interest rate parity and fisher theorem says, people need an incentive to save money (for future consumption). And an interest rate of 1% or 2% on bank deposits is hardly any incentive to save. More so, when I can borrow also at very cheap levels. If the rates were 6% to 8%, one might give it a thought. But at 1%, no way.

Gamma Bleed

World markets are going crazy, and traders all over are bleeding gamma. Volatility has dropped below long term historical levels in a lot of markets, and naturally, traders are sitting long Gamma/Vega.

Nifty seems to scaling new peaks everyday, and is currently trading at 5600+ levels – looking all set to conquer 6000 by the end of this year. The all time peak now appears well within the grasp of the market, and one last moment of euphoria could take us there. Coal India IPO in October would be the final decider – if it goes through, we would be in for a new peak, or else, we may come down from here.

The trade here seems to be going long a strangle – buying 5400 Put and 5800 Call for November/December expiry. Will check the prices in more details tomorrow on this, but if its within 150 INR, then seems like a good trade.

Trading View: August 13

Markets haven't really been moving as per my views in the past few weeks - they have been exceptionally strong. FIIs continue to pump money into the Indian markets, making it the most stable markets even on global-down days. Downside volatility has almost disappeared from Nifty, and markets just seem to be inching up. 


There are plenty of red flags, but for the moment its more like 'ignorance is bliss' once again. The results haven't really been exceptional - with only banks and autos surprising on the upside. Rest all have been a drag on the markets at best. Telecom is almost wiped out completely out of the rally, and so is Real Estate. IT and Metals, which led to the first leg of the rally from 5000 to 5300 levels seems to have gone quiet taking recessionary global cues. Now, for the next leg up, we need pure domestic sectors, and this is where banks and autos fit the bill. Indian banks are primarily a domestic story, with negligible global operations and exposure. And so is the auto sector - with most of the supply being absorbed by local demand. Only Hyundai exports a decent chunk of its production, but thats not listed in India anyways. Other domestic stories are FMCG, and Infrastructure. If we do have a next leg up, I would be betting on Infrastructure more than anything else. 

I'm not particularly bullish over the short term, though over the longer horizon I do believe that as a whole the India story is intact, at least for the next 3-4 years. We do have a case of over-heating and excessive inflation, but these are not big issues to worry about. 

Market View: August 9

This post assumes the reader has seen 'Inception'. In case you haven't, sorry for all the comparisons with the movie. Just to give you a rem/primer on the movie, its a new version of the Matrix trilogy - with more emphasis on the construction of matrix than on action and Trinity. 

We are all dreaming. In fact, we have been dreaming for the past couple of years. The reality was bad, very bad for the human race to digest. The Americans and Europeans who had spent their lives living off their credit card debt were suddenly to be told that it was not the right way of existence. It would have led to widespread depression (not the economic variety), and panic. So, to save the world, Uncle Ben Nolan weaved this dream - that all was well again. 

He injected massive amounts of penicillin in the system, and everyone went to dream. Whether we are in the first level of dreams or further down is anyone's guess. The only certainty is that no one would be able to get us out of it - neither crash landing, and nor any kicks on the back. The dream is much better than the real world - everything appears rosy, markets seem to be making a new high every day, gold is up, real estate prices are back to their peak levels and so are the markets. There are small-cap growth stories floating all around - and there are plenty of multi-baggers waiting to be discovered. Each new guy you meet has a secret of stocks that would become 4x in no time. 

This is not the real world, and we all have been dreaming. In the real world, more than 10% of people are out of jobs. There is a massive oversupply in the real estate markets, and there are no buyers. Government debt has exceeded all their previous highs, and yet show no sign of abatement. Companies are issuing fresh equity/debt at a breath-taking pace, each one trying to go ahead of others. 

Someone would need to start pulling the brakes. Or risk a crash. 

Market View: July 28

After being a bull for quite some time, I'm turning more and more bearish on the markets. Going back to my childhood, I used to feel very happy whenever I got a raise in my pocket money. However, in the end it never mattered, and I was left with same/no savings at the end of the month. The expenses always used to catch with the free money/increment. I guess the same is about to happen with the stimulus spendings - a lot of it has gone down the drain. In the end, people would be left no richer than they were without it - and thats not a happy state as they weren't very rich to start with. 


We are coming close to end of 2010 - the time predicted for the Quantitative Easing to end. Almost three years have passed since the crisis started, and we are no where close to closing down the taps. The stimulus would continue for another year or so, and this isn't a very happy sign. Never mind the asset prices and the booming markets, its all in the dreams. Only, instead of Christopher Nolan its been designed by Ben Bernanke (and its awful). 


Nifty has outperformed the global indices, and has scaled to a new 30 month high. Markets look all set to break new grounds, and may even tough the earlier highs. A lot of FII money withdrawn from the Euro area has entered our markets (with more than USD 2 Billion flow in July). However, do not thing this is a long term shift, but just a temporary parking space. And thats what makes it much more dangerous - we are moving towards the Asian crisis scenario. There aren't too many markets with good GDP growth, and hence it may end up over-heating the handful of markets which are growing now. 


In India, the result season has been very good so far, with most of the top names not reporting any great positive surprises. Add to it RBI's firefighting with inflation, and we do have a possibility of good correction in the markets from here. I wouldn't be surprised if August and September turn out to be bad months for the Indian equities. 


I'm currently short on the markets, and would continue to roll my positions until 5600 is broken on Nifty. Earnings haven't supported to the recent upmove, and markets may find it increasingly difficult to justify their premium to the region. DIIs have been sellers for quite some time now, and FII may very soon find India too overbought. Or worst of all, some one may kick Uncle Ben out of his dreams, and he would put an end to this whole messy maze. 

Europe: The Clouds of Worry

The last time I talked about the markets, it was somewhere close to March, with the budget session grabbing the limelight. The current darling of the market seems to be Europe, and its deficit problems. Greece, Spain and Portugal, all seems to be in big trouble - and they may spell doom for the common currency. US may be breathing the sigh of relief, for two reasons - (a) Its banks are no longer under the spotlight, and relentless attacks from bears all over the world, and (b) USD would continue to be the De-facto reserve currency for the next decade at the least. 


So we have US almost out of trouble from here - substantiated by economic data as well as the market sentiments there. Asia was never under direct trouble (except perhaps fears of bubble in China). Which leaves us with the Europe and all its worries. Markets worldwide are crashing everyday on some news from the region - be it the fresh debt issue cut-offs, or the actions from the Central Bank of Spain. However, in the larger scheme of things, does rest of Europe matter? Take out Germany, France and UK, we are left with a lot of small debt-ridden countries. As long as no one is seriously doubting the debt servicing ability of the big 3, I do not see Europe being too important. They were never the growth drivers in the world economy, and there is no reason why they would hamper it either. It would cause some panic, and spike up the volatility levels, but in all, it won't be catastrophic. People on the street still do not fear for their jobs the way they did in 2008, and this indicator works way better than all the volatility indices of the world to measure the panic levels. 


I'm not saying that it would lead to nothing. There would be serious re-rating of the whole of the world. By no matrices, European nations deserve a better rating than the Asian ones. US and UK may not be as safe as they were 10 years back. It would be a slow and painful process, and every few months, some Euro-block country would be down-graded. However, it should not spook the markets, these nations are over-rated and it would get corrected soon. Very soon, some of the Asian economies might get upgraded - as early as next year.


In a nutshell, I remain bullish on the local markets. Even though the charts tell otherwise, and the world thinks otherwise. I think after the clouds clear over the European skies (pun intended), it would be smooth flying all around. 




Food for Thought: Germany bans short-selling, and markets tank. Spain merges four of its banks and markets tank. Rumors of face-off between North Korea and South Korea, and markets tank. We live in a world where people trust one yellow metal more than anything else. All in a hope that when the world ends, there would be two guys left - me and the jeweler who would buy the metal from me.