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Although India is one of the fastest growing auto markets in the world, buying automotive stocks is not necessarily the best way to profit. Some analysts said that the smarter choice should be those Indian companies that manufacture automotive parts.
India is an emerging force in the auto parts industry. One of the reasons is that the wave of outsourcing has benefited India and the industry. Parts makers expect annual sales to increase by 30%, and the Indian Automotive Component Manufacturers Association expects sales in 2010 to increase from the current $1 billion to $2.7 billion.
Low production cost is the biggest advantage. General Motors said that auto parts produced in India cost 30% less than the United States and Europe and about 15% less than South Korea and Mexico. Global automakers have noticed: General Motors said last week that it expects annual purchases of auto parts from India will reach $1 billion in 2008, and this year's purchases amount to $120 million.
This is indeed good news for companies such as Bharat Forge, India’s largest auto parts exporter. The company's stock price is not cheap, reaching approximately 20 times the expected earnings per share for the fiscal year ending in March next year, while the ratio of earnings for some automotive stocks in India is almost 12 times.
However, many analysts believe that Bharat Forge has huge potential for growth, and they expect the company's earnings to accelerate as more foreign automakers source parts from India.
On Wednesday, Bharat Forge’s share price rose nearly 2% to close at 310.10 rupees ($7.13). The stock has risen 43% since the beginning of January, while the Bombay Stock Exchange's sensitivity index has risen by less than 16% over the same period.
According to Jiten Doshi, automotive analyst at Enam Securities in Mumbai, Bharat Forge’s share price can reach 500 rupees in two years. He said that this is not just a cost advantage, but also Bharat Forge's design and development capabilities. One third of Bharat Forge’s revenue comes from India, and Dush believes that the company has high-speed growth efficiency, especially its commercial vehicle axles and other products.
Rico Auto Industries, an aluminum casting company, also benefited from the outsourcing boom. Dosh said he expects the company’s sales and profits to increase by 25% annually over the next three years. He said that Rico’s stock price is 17 times as much as its expected earnings per share for the fiscal year next March. The stock rose 2.2% on Wednesday to close at 82.85 rupees.
Enam Securities also likes Motor Industries, a subsidiary of Germany's Robert Bosch Co., Ltd. The company produces a wide range of products including traction hydraulic systems and car audio.
Despite the substantial increase in spare parts sales, India’s auto sales have grown strongly in 2004 and have slowed in recent months. In 2004, India’s car sales exceeded 1 million for the first time. Analysts attributed the slowdown to an increase in fuel prices and a certain degree of saturation in some auto markets.
However, Angel Broking’s Huzefa Suratwala in Mumbai said that sales in the two main areas of the Indian market, cars and commercial vehicles, should increase by 10%-15% every year for the next two years. He said that the automobile penetration rate in India is still quite low compared with other developing countries.
ICICI Securities forecast last month that the entire automotive industry, including automakers and component manufacturers, will have revenue growth of around 22% over the next 18 months.
The situation of some Indian automakers is still very good. In the quarter ended June 30, Mahindra & Mahindra, the largest manufacturer of tractors and multi-purpose vehicles in India, reported a 39% increase in net profit from the same period last year to 1.45 billion rupees. Analysts expect that the company's earnings will continue to grow strongly because of the increasing popularity of utility vehicles. Mahindra’s market share in India’s domestic multi-purpose vehicle market is 45%.
Ahmed Kaset of Motilal Oswal Securities in Mumbai expects that sales of utility vehicles will increase faster than cars in the next 4 years, and the market share will increase from the current 20% to 35%-40%. He rated Mahindra as buying, saying the company is in the best position for this trend.
Mahindra's share price has risen nearly 24% this year, and the current PE ratio is slightly lower than most competitors. The stock rose 1.3% on Wednesday to close at 688.90 rupees. Kassee expects that the stock will reach 1,000 rupees within 18 months.
Despite the continuous growth, but the automotive industry is also hidden. The fierce competition in the market share of cars has caused some manufacturers to pay a price. For example, Maruti Udyog, a joint venture between Japan's Suzuki Motor and the Indian government, lost market share to foreign competitors such as Hyundai Motor, which has cut prices significantly.
Although Maruti’s sales are still strong, analysts believe its stock price has little potential to rise. Manish Chokhani, managing director of Enam Securities, said: "My sense is that Maruti's market share has reached its peak." Maruti's stock price fell 1.3% to close at 479.30 rupees on Wednesday.
Tata Motors also faces pressure from foreign competitors, especially car makers. Analysts said Tata has adjusted its product portfolio to meet the challenge. The company’s tradition of focusing on commercial vehicles is conducive to its development, as government spending on infrastructure projects will boost its sales. Tata is also expanding through overseas acquisitions, such as the recent acquisition of a 21% stake in Spanish passenger car manufacturer Hispano Carrocera, enabling it to acquire the company’s technology and brand.
Tata shares rose 2% on Wednesday to close at 481.45 rupees. Casset of Motilal Oswal Securities stated that he believes Tata will fluctuate within the range of INR 460 to Rs 500 during the next 12 months.
Dash of Enam Securities rated Tata as holding. He said he believes that if the company can expand production within 3 to 5 years, the valuation of the stock will increase.
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