Company Profile: Tata Motors

Company Profile

Tata Motors is the most global of Indian auto companies, and its product portfolio includes passenger/goods carriers, passenger cars, and utility vehicles. It is India’s largest auto company by volume and 4^th largest truck manufacturer globally.

Over the years, it has acquired Daewoo’s Korean CV plant, and Jaguar Land Rover in UK. Its manufacturing facilities are located in Jamshedpur, Pune, Lucknow, Patna, Sanand and Dharwad.

Market Segmentation and Volumes

Tata Motors is present across almost all the segments (except 2W). Its JLR unit sells ~200k vehicles per year.

In the CV segment, overall sales are ~500k, and it has a dominant market share there. In the private vehicles segment, Nano has revived the overall sales number for the company, and it now sells ~200k units there. Its market share in private cars is 10% (compared with 50% for Maruti).

Its EPS is very volatile over the years due to large acquisitions, and huge debt on the books. However, the debt concerns are easing now, and D/E has come down from 6 to 2 from 2007 to 2010. Its projected EPS for 2011 is ~100.

Company Profile: Maruti Suzuki

Company Profile

Maruti is the market leader in small car and compact car segments in India. It was set up as a JV between the government of India, and Suzuki Motors. Government subsequently divested part of its stake, and currently Suzuki is the majority stake-holder.

Maruti is the oldest car manufacturer (among the current ones), and has one of the most trusted brands in the nation. It has the widest network, and has good presence in tier 2 towns as well.

The management team has been stable over the years – Shinzo Nakanishi is the CEO and MD. Over the past years, it has witnessed a volume growth of 14% CAGR, and revenue growth of 25%.

Market Segmentation

Maruti is the market leader in small and compact car segment, and has an overall market share of 50%. In the coming years, it is expected to lose some of the market shares to the new entrants, though it is still expected to be the leader with ~40-45% share.

Currently, Maruti sells around 100k cars per month, or 1.2mm cars a year. Bulk of the volume is from the domestic market sales, with exports accounting for only 10-12% of the volumes. Going ahead, its going to be a capacity constrained market, and Maruti has been adding capacity aggressively.

Cash EPS per share is INR 110, and at price of 1200, the stock is attractive.

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.