Auto Industry Equity Valuation Summary

In my previous posts I shared my valuation of the shares of  Bajaj Auto (NSE: BAJAJ-AUTO), Bosch (NSE: BOSCHLTD), Eicher Motors (NSE:EICHERMOT), Hero Motocorp (NSE:HEROMOTOCO), Mahindra and Mahindra (NSE:M&M), Maruti Suzuki (NSE: MARUTI), and the two types of Tata Motors' shares listed on the NSE, the ordinary shares (NSE: TATAMOTORS) and the DVRs or the "A" ordinary shares (NSE:TATAMTRDVR). This covers all the scrips belonging to the automobile industry in the Nifty. Now I undertake a comparative analysis based on my study of the individual scrips to get a picture of how their pricing and valuation may be being influenced by their solvency, liquidity and profitability ratios. The various ratios are tabulated for each scrip in the table below. The largest value is highlighted in green and the smallest in red.

Looking at the premium/discount at which I have valued the scrip compared to the market price, it can be seen that Bosch limited is the most overpriced and it would have to lose 82% of its current price to converge to its value. This is also seen in the price to earnings and the price to book ratios which are much higher than the industry average. However, Eicher Motors, despite having a slightly lower discount of around 66%, still has the largest price to earnings ratios in the industry. The price to earnings ratios of these two scrips are very high and leads one to doubt whether the buoyant investor sentiment about them is justified. They also fare unfavourably in some of the financial ratios, for instance net profit to total equity, also called return on equity, lags the industry for both these scrips. Their sales to receivables and sales to inventory are also low, indicating more proportion of receivables and inventory to sales when compared to the industry. This indicates a not very lean value chain in comparison to the other players, with sales driven by delayed collections and maintaining high inventory levels.  

Maruti Suzuki is another stock with a high price to earnings ratio, but its discount over the traded price is very low when compared to most of the other stocks, which could be because its liquidity ratios are indicative of a lean value chain. The Tata Motors DVR is trading at premium, and quite predictably has the lowest price to earnings ratios of all the scrips.

M&M is another poorly performing scrip in this analysis, with a discount of around 70%. It has a very high debt to assets ratio at 80%, and consequently its interest coverage is very low at around 2. It has the lowest sales to inventory among all the players and its sales to receivables also lags the industry. It also has the lowest net profit to total equity amongst all the players. 

Bajaj Auto and Hero Motocorp also have discounts of the value over the market price of over 30%. Given the high P/E ratios of a few of the other players, the P/E ratios of these two are lower than the industry, despite being in the twenties which can be called high. However, their sales to inventory and sales to receivables ratios are very healthy, and indicative of a lean value chain. On a return on equity basis too, these are the best among the lot.    

My Valuation of the Shares of Bajaj Auto Ltd.

In this post I value the shares of Bajaj Auto Ltd. Within the sub-sectors identified in the automobile sector, Bajaj plays in the two-wheeler and the three-wheeler industry. In the two-wheeler sub-sector, the relevant market share for it is only in the motorcycle segment where it competes with a market share of around 18%. The company had a market share of 90% in the petrol and alternate fuel driven three wheelers. In the small diesel market too it dominated with a 65% market share. In the large diesel category, however, it was a laggard with only 20% market share. After entering the cargo segment in FY 2016, Bajaj has clocked double digit market share in that segment, further growing its presence in the three wheeler segment. It has also been consistently increasing its spare parts sales.

Historicals and Forecast     

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2017 onward, the numbers are forecasts.

I now discuss the growth trends in the various income statement items on a CAGR basis between 2012 and 2016. While the net sales increased at a little over 4%, a 10% decline in the other operating revenue kept the revenue from the operations growing a little under 4%. The healthy 8% growth in the other income led the total revenue to grow a little over 4%.

Coming to the expenses side, while the cost of the raw materials remained nearly constant, the expenses due to the purchased gods increased by over 14%. While the expenses due to the employee cost also increased at a little over 14%, the finance costs decreased drastically at over 60%. Although the depreciation and amortization (D&A) and the other expenses showed high growth rates of 20% and 12% respectively, the fact that the cost of the raw materials, which remained nearly flat, was the largest constituent of expenses, led the total expenses to grow at a moderate rate of around 3%. Consequently, the profit before tax grew at around 7%. Since the tax expense grew at around 14%, the profit after tax had a slower growth rate of 6%. 

Coming to the liabilities side of the balance sheet, the growth of the reserves and the surplus by around 22% led the shareholder's equity to grow at around 21%, since the share capital remained essentially unchanged. Since the non-current liabilities and the deferred tax liabilities grew at 13% and 40% respectively and the other long-term liabilities and the long-term provisions decreased by 34% and 19% respectively, the total non-current liabilities remained more or less unchanged. Coming to the current liabilities, while the trade payable remained nearly flat, the other current liabilities grew at 2%. However, the decrease of the short-term provisions at over 37% led the current liabilities to decrease by over 10%.

Coming to the assets side, the fixed assets grew by over 8%, mostly on the back of the growth of the tangible assets by over 7%. Similarly the non-current investments grew by over 22%, which raised the growth of the non-current assets to around 19%, despite the slow growth of the fixed assets. Coming to the current assets, the current investments was its largest component and grew by around 3%, augmented by the growth of the trade receivables by over 14%. However, since most of the other items in the current assets decreased significantly, the total current assets went down by about 3%.

The Valuation

The FCFE decreased to ₹6,273 crore in 2026 from ₹7,482 crore in 2016. To find the value due to the FCFEs in the forecast period from 2016 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.63. Together, these yield a cost of equity of 11.16%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

Together, this set of assumptions yields a valuation of ₹1,988 for the Bajaj Auto's share. Hence at over ₹2,833, the scrip seems highly overpriced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

My Valuation of the Shares of Bosch Ltd.

In this post I value the equity of Bosch Ltd. Bosch plays mainly in the field of automobile ancillaries. Hence its fortunes are linked to the growth of the automobile industry in addition to its own market share gains. As I said in my post on auto ancillaries and spare parts, while Bosch has been steadily increasing its sales, this increase is not keeping pace with the burgeoning market size and hence the market share is reducing. Bosch is expected to face market share challenges going ahead because global OEMs are increasingly sourcing from India, meaning that other global OEMs start encroaching into Bosch's turf in India.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2017 onward, the numbers are forecasts. My data is taken from moneycontrol.com, since for this company, the website was not very helpful in getting the annual reports.

Let us analyze the growth trends in some important income statement and balance sheet items on a CAGR basis between 2012 and 2016. On the revenue side, total income from operations grew at 4.8%, in line with net sales, which was its biggest contributor, the other operating income making a much smaller contribution. The largest expense item, consumption of raw materials, decreased by a little over a percentage. Purchase of traded goods increased by around 13% and increase in stocks by around 28%. Employees cost and depreciation increased by 10% each. A huge increase in interest expense at 76% was more than made up for by other income which increased by over 45%, but growing from a larger base than the interest expense, more than covered for the growth of the latter. Consequently, profit before tax grew by 6.4%. The growth of tax at a lower rate of 5.9% led the profit after tax to grow by 6.6%.

On the liabilities side, although the net worth increased by around 15% due to the increase of reserves by as much, the decline in total debt by over 47%, led the total liabilities to grow at a lower rate of 13.7%. On the asset side, the growth of gross block by 11.8% and that of the depreciation at a lower rate of 10.4% led the net block to grow at over 17.7%. Total current assets grew by 9.4%, aided by the growth of sundry debtors at 10.1% and cash and bank balance at 17,8%. The growth of investments by 23% was a significant addition to the non-current assets. Another major contributor was loans and advances which grew at 8.2%.

Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.          

The Valuation

The FCFE increased to ₹2,374 crore in 2026 from ₹1689  crore in 2016. To find the value due to the FCFEs in the forecast period from 2016 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 1.33. Together, these yield a cost of equity of 16.33%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

Together, this set of assumptions yields a valuation of ₹3,828 for the Bosch Ltd.'s share. Hence at over ₹21,905, the scrip seems hugely overpriced.

A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

My Valuation of Eicher Motors' Shares

In this post, I provide a valuation of Eicher Motor's equity. As I had written in my post on the two-wheeler market share trends in India, Eicher Motors' Royal Enfield brand gained a 1.5 percentage point market share between 2014 and 2016. The more relevant metric is, however, the 80% market share it has among motorcycles priced between one and two lakh rupees, a niche that is expected to sell one million units in CY17. The company's spares and service sales too has been increasing at a rapid pace.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2016 onward, the numbers are forecasts.

Let us analyze the growth trends in some important income statement and balance sheet items on a CAGR basis between 2011 and 2015. Revenue from operations net of excise duty increased by around 20%, and since it is the most important component of total revenue, the latter also increased by as much. Cost of materials consumed was the largest contributor at around 60% to the total expenses, and hence the growth of the former by around 16% limited the growth of the latter to around 19% despite the much higher rate of growth of its other constituents. The difference in the growth rates between the revenue and the expenses, combined with the low level of profit when compared to either of these, led the profit before tax to grow by around 24%. Although the tax expense increased by around 30%, the minority interest decreased by 10%, leading the profit after tax to grow by 32%. 

Coming to the liabilities side of the balance sheet, the increase in the reserves and surplus by around 16% increased the total shareholder's equity by around that much. The minority interest increased by 7.4%. Deferred tax assets and long-term provisions increased by 32% and 24% respectively, leading to an increase in the non-current assets by around 27%. Coming to current liabilities, which increased by 21.5%, trade payable and other current liabilities were its largest constituents, and increased by 24% and 18% respectively. 

On the asset side, fixed assets grew by around 22%, aided by the growth of tangible assets at around 27% and intangible assets at around 89%, but hindered by the reduction in capital work in progress at around 10%. High rates of growth of non-current investments and other non-current assets led the non-current assets to increase by approximately 27%. A nearly 17% reduction in cash and cash equivalents which constituted around 44% of current assets in 2011, kept the growth in current assets at a moderate 8.8%. 

Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.            

The Valuation

The FCFE increased to ₹2,177 crore in 2025 from ₹ 899 crore in 2015. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.71. Together, these yield a cost of equity of 11.75%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

The value finally arrived at is ₹7790, which is around 68% lower than the current price of around ₹24,750. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below. 

My Valuation of Hero Motocorp's Equity

In this post, I provide a valuation of Hero Motocorp's equity. As I have written in my earlier post on the two wheeler market in India, while Hero's market share in the two wheeler sub-segment was above 40% in CY14, it decreased to below 37% in Apr-Nov 2016. However, it can seen to be increasing its spares sales consistently over the past few years.  

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2017 onward, the numbers are, of course, forecasts.

Total revenue increased at a CAGR of 5% between 2012 and 2016, broadly in line with its largest contributor, gross sales of products. Total expenses on the other hand increased at a CAGR of only around 4%. Its largest contributor, cost of materials consumed grew at a CAGR of only 2.7%, but the second largest item, other expenses, grew at a CAGR of 16%. However, due to significant decreases in depreciation and changes in inventory, the growth in total expenses stayed moderate. Consequently, profit before tax grew at a healthy rate of over 11%. However, due to the high CAGR of the tax expenses at around 27%, the profit after tax grew at only 7.1%.

Coming to the balance sheet, reserves and surplus grew at a CAGR of around 17%, leading to the shareholder's equity growing by that much. Among the non-current liabilities, long-term liabilities decreased by 57% and long-term provisions increased by 22%, both on a CAGR basis. This caused the total non-current liabilities to reduce by around 27% on a CAGR basis. Among the current liabilities, the trade payables increased by 4.8% on a CAGR basis, but the other current liabilities and the short-term provisions decreased by 17% and 7% respectively, both on a CAGR basis, leading the total current liabilities to decrease by around 2%, also on a CAGR basis.

On the asset side, tangible assets and capital work in progress increased by 21% and 65% respectively, but intangible assets decreased by 51%, leading the fixed assets to grow at around 4%, all on a CAGR basis. When the double digit CAGR growth of long term investments, long term loans and advances, and other non-current assets gets added to this, the growth of total non-current assets becomes 6.3% on a CAGR basis. High growth rates of trade receivables, cash and cash equivalents and other current assets was kept in check by the moderate decline in current investments, which is the largest component of current assets, to keep the growth rate of current assets at 5.3% on a CAGR basis.           

Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.

The Valuation

The FCFE increased to ₹3,867 crore in 2026 from ₹2019 crore in 2016. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.67. Together, these yield a cost of equity of 11.45%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

The value finally arrived at is ₹2016, which is around 36% lower than the current price of around ₹3160. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.    

My Valuation of Mahindra and Mahindra's Equity

In this post I deal with Mahindra and Mahindra Limited's equity valuation. In the passenger vehicles sub-sector, despite the rapid growth of the SUV segment, where the company has market leadership, the erosion of its market share in that segment has led to a decrease in market share for the brand in the past two years. Coming to three wheelers, M&M has a market share of 10% marginally lower than the share the year before. In the two-wheeler sub-sector, Mahindra Two Wheelers Limited had a market share of 0.33% in the Apr-Nov 2016 period. It also lost some market share between 2014 and 2016. Coming to the commercial vehicles sub-sector, Mahindra and Mahindra dominates the LCV segment with a more than 50% market share in the load carrying LCV segment. In the commercial vehicles segment as a whole, the company had a market share of 26% in the time period April to November 2016, which was a percentage point less than CY 2015, possible because Tata Motors started reclaiming market share in the LCV segments with new launches around that time. Despite facing challenges in maintaining the market share in the sales of its vehicles, the company has increased its spares sales consistently over the past four years.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2017 onward, the numbers are, of course, forecasts.

The data up to 2016 is taken from the annual reports and refers to the financial year data. Between 2012 and 2016, the total revenue grew 7.1%, helped by the growth in other income which increased by a whopping 127% on a CAGR basis. The revenue from operations too has been growing at a CAGR of 4.1% in that time period. Expenses grew by 7.5% on a CAGR basis, propelled by an 11% CAGR increase in other expenses which constitutes 24% of the expenses. While purchases, finance costs and depreciation grew by double digits, the slow growth of the cost of materials consumed kept the expense growth in check. However, since expenses grew faster then revenue, a trend that can be seen forecast in to the future, the profit before exceptional items and taxes grew only at a CAGR of 0.7%. When a high rate of decline of exceptional items is factored in, the profit before taxes grew only at 0.3% on a CAGR basis between 2012 and 2016. 

    

Coming to the liabilities side of the balance sheet, both current and non-current liabilities have shown a double digit increase. In the non-current liabilities, deferred tax assets was the fastest growing item with a CAGR of 21%. The largest contributor to non-current liabilities, long term borrowings, grew at around 12% on a CAGR basis. Coming to current liabilities, short term borrowing grew at a high CAGR of 30%, while the largest item, trade payables, grew at a moderate CAGR of around 8%. 

Moving on to non-current assets, fixed assets grew at a CAGR of 6.7%, due to the moderate growth of its largest component, tangible assets at a CAGR of 4.5%. The fastest growing item here was intangible assets under development which grew at a CAGR of 46.2%. Long term loans and advances was a large item within non-current assets and it grew at a CAGR of over 22%, and along with non-current investments which grew at a CAGR of over 26%, led to the non-current assets growing at a CAGR of 15.3% between 2012 and 2016. Current assets grew at a CAGR of 12.5% because current investments, inventories and short term loans and advances grew by double digit CAGRs.

Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.

The Valuation

The FCFE decreased to ₹2727 crore in 2026 from ₹4,955 crore in 2016. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.87. Together, these yield a cost of equity of 12.93%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

The value finally arrived at is ₹410, which is around 70% lower than the current price of around ₹1300. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

My Valuation of Maruti Suzuki's Equity

In this post I deal with Maruti Suzuki's equity valuation. In the passenger vehicles sub-sector, Maruti Suzuki has been consistently gaining market share in the past three years, the only one in the top five by market share to do so. It has also grown its spare parts sales significantly. In the commercial vehicles sub-sector, Maruti Suzuki entered the LCV sub-segment in 2016, but has a negligible market share.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in millions of rupees, whereas the third is in percentage.

The data up to 2016 is taken from the annual reports and refers to the financial year data. In this time period, total revenue grew at a CAGR of 12.5%, while the total expenses grew at 10.8%, leading to an increase in profit before tax and profit after tax of 33% and 29% respectively. Within the total revenue, gross sale of products grew by 13%, but the excise tax on it grew by 18%, both on a CAGR basis. On the expense front, while cost of materials consumed, which is the largest expense item and constitutes 78% of the total expenses, grew only at a CAGR of 8%, employee benefits expenses and depreciation grew at high rates of 24% and 25% respectively. The rapidly increasing net income and depreciation contribute to a high FCFE (free cash flow to equity) growth rate, which is forecast to continue into the future.

Coming to the balance sheet, reserves and surplus constitutes 69% of the total liabilities. and has grown at a CAGR of 14% from 2012 to 2016. Though some other liability items have been growing at a much faster rate, their smaller contribution means that the total liabilities grows only at a CAGR of 16%. On the asset side, the largest components are tangible assets (31%) and non-current investments (43%), which have been growing at a CAGR of 21% and 62% respectively from 2012 to 2016. Almost all the non-current investments are in mutual funds. The high growth rate of these large components is balanced out by the significant decline in cash and bank balances from over 25 billion rupees in 2012 to under 500 million rupees in 2016, at a CAGR of 64%.

All forecasts have been done based on a linear trend.

The Valuation    

Finally, the FCFE grows to ₹179746 million in 2026 from ₹116058 million in 2016. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.81. Together, these yield a cost of equity of 12.49%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

          

The Price

The value finally arrived at is ₹4782, which is over 20% lower than the current price of around ₹6110. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

My Valuation of Tata Motors' Equity

After the industry analysis of the automobile sector, I am moving on to the valuation of individual companies. To start with, we have the stock in the eye of a corporate governance controversy, Tata Motors. Tata Motors competes in the passenger and commercial sub-sectors of the automobile sector, giving three-wheelers and two-wheelers a miss. In the passenger vehicles segment,  Tata Motors has been steadily losing market share, struggling to stay above a 5% market share threshold. In the commercial vehicles market too, the company has witnessed declining market shares in all the categories. In the spare parts market, Tata Motors is the only automobile OEM which has not been growing its sales.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. 

The data up to 2016 is taken from the annual reports and refers to the financial year data. Revenues can be seen to be showing a healthy increase each year, although for 2016 the growth is slightly lower than the previous years. I have forecast it to continue to grow based on a linear trend based on the previous five years. Hence, total revenue from operations grow from around 2.8 lakh crores in 2016 to around 5.8 lakh crores by 2026. The average rate of excise duty was calculated based on the previous five years and this was applied to the 2017 revenue, and so on for every year the average excise duty rate of the past five years was assumed to apply to the total revenue from operations. This makes the excise duty forecast for 2026 around 10,000 crores. A linear trend when applied to the other income from 2012 to 2016 raises it from 982 crores in 2016 to 1636 crores in 2026. The net income and the depreciation have been taken from the income statement for the calculation of the free cash flow to equity (FCFE). Despite the slow growth of the net income, the significant increases in the depreciation lead to the FCFE having a healthy growth rate over the years.  

An analysis of the expenses shows that it has been increasing at a faster rate than the revenues. While the total revenues grew only at a CAGR of 14% from 2012 to 2016, certain items of the expenses grew at a much faster rate, bringing the profit margins down drastically. Notable among these were employee cost (24%), depreciation (32%), product development (26%) and exceptional items (26%). Together, these dragged the profit after tax down by a CAGR of 5% from 2012 to 2016. Since I have forecast the expenses to increase based on a linear trend, the net profit margin continues its downward trajectory in to the future, hitting 2.3% by 2026.

On the balance sheet too I forecast all items based on a linear trend, except the reserves, which are calculated as the difference between the total assets and the liabilities except the reserves. On the liabilities side, the largest contributors are long term borrowings, trade payables and reserves. The have shown increases of 17%, 15% and 25% respectively on a CAGR basis between 2012 and 2016. The total liabilities are forecast to increase from 2.7 lakh crores to 5.9 lakh crores from 2016 to 2016. On the asset side, there are no single large contributors, with each item contributing less than 20% of the total. From the balance sheet I obtain the change in working capital, net borrowing and capital expenditures to calculate the free cash flow to equity. Due to the linear trend forecast adopted, these cease to vary after a few years.       

The Valuation

Finally, the FCFE grows to 36365 crores in 2026 from 1888 crores in 2016. These are split between the ordinary shares and the DVRs ('A' Ordinary shares) based on the number of shares of each projected, again based on a linear trend. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta for both types of shares have been taken from online sources. These are 1.41 for the ordinary shares and 1.75 for the DVRs. Together, these yield a cost of equity of 16.92% for the ordinary shares and 19.43% for the DVRs. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.  

The Price

Together, this set of assumptions yields a valuation of ₹ 440 for the ordinary share and ₹ 346 for the DVR. Hence at over ₹ 500, the TATAMOTORS scrip seems overpriced significantly, whereas the DVR at at around ₹ 320 seems fairly priced.

A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

It can be seen that in no instance does the ordinary share's price begin to approach its current price  of around  ₹ 510 and that the range of prices for the DVRs includes its current price of around ₹ 320.

Analysis of the Automobile Ancillary and Spare Parts Market in India

The automobile ancillary and spare parts market relates to those components which appear as a part of the automobiles, after either assembly (ancillary) or repair (spare parts). The following graph illustrates the growth and forecasts for the Indian automobile ancillary and spare parts market size. Data taken from reports available online.

It can be seen that the market is poised to grow from under 500 crores presently to over twice that much in the five year period from 2016 to 2021. So this presents a great opportunity for ancillary companies like Bosch as well as the automobile OEMs to grow their revenue through sale of ancillaries and spare parts. Now I explore the trends in the sale of ancillaries and spare parts by Bosch and various automobile OEMs.

Bosch India Automotive Sales Trends 

Bosch classifies its independent auto parts sales under its mobility solutions division. Automotive sales constituted 87% of Bosch's sales in FY16, so it is the most important market for the company to play in. The graphic below shows that while Bosch has been steadily increasing its sales, this increase is not keeping pace with the burgeoning market size and hence the market share is reducing.

Various factors have been pointed out by the management as leading to the sales increase in FY16. In the diesel systems category, in which the company was reported to have a 70% market share in 2015, growth has been led by new generation technologies such as common rail systems and distributor pumps. The growth of this division in FY15 was attributed to the company's localisation approach. In the gasoline segment, increased market share in the domestic passenger car segment drove growth for the company in FY16. In the previous year, there had also been an expansion of the sales network through the addition of 300 new distributors.

But why is the overall market expected to increase so drastically that Bosch's market share estimated based on projected 2016 figure drops so much? Although the growing automobile market is cited as one of the reasons for the burgeoning ancillary market, Bosch seems to have outpaced this growth. Hence it has to be reasons other than this. One of them could be the fact that global OEMs are increasingly sourcing from India, meaning that other global OEMs start encroaching into Bosch's turf in India. 

Automobile OEM Spare Parts Sales Trends                         

The sales trends for automobile OEMs spare parts sales shows that all the OEMs considered except Tata have been growing their spare parts sales at a healthy rate. This could be because Tata Motors' market share in both the passenger and commercial vehicles have declined in the past two years. It stands to reason that the more of your vehicles are on the road, the more spare parts are also demanded for their repair. Although this seems to have affected M&M less, because it can seen to have increased its spare parts sales despite having lost market share in all the sub-segments it competes in that I have explored in my earlier posts, except the commercial vehicles sub-segment. 

Bajaj Auto, while holding its market share in the two wheeler market just about steady, has been gaining in the three wheeler market, hence its spare parts sales ought to increase. Hero has been showing a good growth in spare parts sales despite losing market share in the two wheeler market, which could be because its large number of vehicles on the road demand significant spare parts, since it has over a 35% market share in the two wheeler sub-segment. Maruti too has lots of vehicles on the road, so with a roughly 50% market share in the passenger vehicles sub-segment it too would be expected to grow its spare sales significantly, which it can be seen to have done.

Eicher Motors reports spares and services sales in a consolidated manner while following a calendar year convention (until recently) in some years, so it has been represented separately below. Since Royal Enfield has been increasing its market share, it stands to reason that their spares sales too would increase, which can be seen to be the case.

It's of course not that simple since pricing too adds to the sales. All OEMs seek to opportunistically charge a higher price for their spares, and this too would add to sales. I may explore this aspect in more detail while covering the companies individually.  

Summary   

To sum this article up:

1. The automobile ancillary and spare parts market has seen high growth in the past few years and is expected grow much faster going ahead. 
2. Bosch is a significant player in the market, which has grown its sales significantly, but has been seeing a decrease in its market share due to the far higher market growth rate.
3. Almost all auto OEMs are growing their spare parts sales as well, with the exception of Tata Motors.

Market Share Analysis of the Two-Wheeler Market in India

After having covered the market share trends in the three-wheeler, passenger and commercial vehicles industries in India, I now turn my attention to the two wheeler industry. While I have discussed the segmentation of two-wheelers in my broad post on the Indian automobile industry, in the graphic comparison of market share over the past three years shown below, the previous years' trends are shown only for the segment as a whole. Where not explicitly mentioned, the reference is to the two-wheeler market as a whole and not to scooters or motorcycles. 

It can be seen that the two wheeler market as a whole is an oligopoly with the top four players having 90% of the market between them. Further, the top two players have over 60% of the market between them. Market dominance is even more concentrated when we start looking at the scooters and the motorcycles segments. In both of these, the market leader sells more units than all the others combined. While in scooters, Honda has dominance, the leader in the motorcycles segment is Hero. Coming to the market sizing for motorcycles and scooters, in CY 2015, while 48,80,117 scooters were sold in India, the motorcycle sales was 1,05,23,909, i.e., over twice the scooter sales. Hence, having leadership in the motorcycle segment gives Hero the edge in the segment as a whole, where it enjoys a 36% market share, as opposed to Honda which has only a 27% market share. 

TVS and Bajaj are the other major players in the industry. While TVS has only a 14% market share in scooters and less than 8% in the motorcycles, it edges out Bajaj to claim third place with a 14% market share in the two wheelers segment. This is despite Bajaj having third place in the motorcycles industry with an 18% market share, since it does not compete in the scooters market.      

Hero Motocorp Market Share Trends 

Hero has been steadily losing market share in the past three years as can be seen from the market share trend graphic. While it was above 40% in CY14, it decreased to below 37% in Apr-Nov 2016. A variety of factors are blamed for this drop. In FY 2015, the drop in rural incomes due to low agricultural output and a decrease in Government income schemes was blamed for the drop in Hero's sales volume, given that rural demand was a major source of Hero's sales. This is partly because Hero competes predominantly in the smaller commuter bike segments whose buyers are skewed more towards the rural areas. Hero has also missed out on the growth of the premium bike segment, and despite having seven products in the above 150 cc category, had a market share of only 6% in that category as of March 2015. 

On the product front, technology has been called the "chink in the armour" of Hero. Its products have apparently undergone only minor changes since they were launched. It is well aware of this and has tried in many ways to improve in this regard. It invested ₹ 850 crores in an R&D facility in Jaipur that was inaugurated in 2016 to develop "consumer oriented and market relevant products". The former head of BMW Motorcycles has been roped in to make the brand and the vehicles more "modern and contemporary". Earlier, it had bought a 49.2% stake in an U.S. based R&D firm Erik Buell Racing (EBR) with the aim to have EBR develop a series of bikes and technologies for Hero. This, however, backfired as EBR went bankrupt leaving Hero with an impairment loss of ₹ 155 crore.

Honda India Market Share Trends 

Honda Motorcycles and Scooters India (HMSI) has been steadily gaining market share in the period represented in the graphical analysis. Its growth is facilitated by the market leadership position it enjoys in the scooter segment, which has been showing a high growth rate, for instance it grew by 20% in Apr-Nov 2016 on a year on year basis. This leadership is facilitated by its evergreen and blockbuster product, the Activa.  According to analysts, Honda plugged the gap in the scooter market created due to the exit of Bajaj Auto. Its dependence on the scooter market can be gauged from the fact that in early 2016, it opened the largest scooter only factory. 

Its growth has also been aided by the sales of its 125 cc motorcycle CB Shine, which crossed  the one lakh sales milestone within nine months of its launch, and was the best-selling non-Hero motorcycle in November 2016. Another successful launch in 2016 was the Navi, a small bike with an automatic transmission that can be called a crossover between a scooter and a bike, which sold over 50,000 units in six months since launch.

TVS Motor Market Share Trends

Like Honda, TVS too can be seen to be stronger in scooters. It has a nearly 14% market share in scooter whereas its share in the motorcycle market is only roughly half that much. In November 2016, it had two scooters in the top ten best-selling scooters with its Jupiter being the second best-selling model, whereas in the motorcycle segment, its best-selling model the Apache was only the tenth best-selling. However, its best-selling model is neither a scooter nor a motorcycle, but a moped, the XL Super, which was the fourth best-selling two-wheeler in November 2016.

The company expects increasing demand for its scooter Jupiter and motorcycle Victor to drive market share growth to 15% in FY17, and increase it to 18% in two years. It also wants to enter the 125 cc category of scooters in the first few months of CY17. 

Bajaj Auto Market Share Trends

Bajaj Auto has not had a significant change in its market share, having lost some and gained it back, in the period depicted in the graphics. The relevant market share for it is only in the motorcycle segment where it competes with a market share of around 18%. It had three brands in the top ten best-selling motorcycles list for November 2016, the sports bike Pulsar and the entry level commuter category bikes Platina and CT, both of which have around 100 cc engine capacity. It is in the 125 cc category that Bajaj is under-performing with its Discover brand sales in that category not up to scratch. 

The commuter segment is an important segment which contributes to 80% of the units sold in the motorcycle market. Above it lie the value segment which are the more powerful commuter bikes and entry level sports bikes and beyond them the premium sports bikes. In the premium category, Bajaj had an enviable 47% market share around mid-2016, due to the good sales of their Avenger brand. With the good reception that its new value segment 150 cc bike V has received, and with the big expectation surrounding its premium 373 cc bike the Dominar, which they hope will sell 2 lakh units a year going ahead, the company hopes to garner 22-23% market share in the motorcyles segment in FY17. 

Yamaha India Market Share Trends  

Yamaha Motor India Limited has seen a healthy increase in its market share, to the tune of one percentage point, in the period shown in the graphics. It currently has a little under a 5% market share. AS of mid-2016, there was an even split between motorcycles and scooters when it came to Yamaha's sales. It had a 7% market share in scooters at that time and was looking to increase it to 10% by end of FY17. It aims to target both the style conscious and the utility conscious customers with multiple offerings within the scooter segment. Its focus is on urban consumers, and products tailored to them will be offered to rural consumers as well, since the company believes that urban tastes dictate success in both urban as well as rural markets. While in the premium motorcycle category, it has the R15 and in the sports category the FZ series, its commuter range was augmented with the Saluto RX, which was hoped to be saleable in rural pockets as well. It targets sales of one million units of two wheelers in CY 2017 , and wants to increase market share to 10% in 2017-18.

Royal Enfield Market Share Trends

Royal Enfield has seen the best market share gains among all the players in the graphical analysis, at around 1.5 percentage point market share gain in the time period under consideration. The more relevant metric is, however, the 80% market share it has among motorcycles priced between one and two lakh rupees, a niche that is expected to sell one million units in CY17. This is believed to be on account of the management's right decision to remain in a niche segment and cultivate that segment through marketing. In early 2016, it overtook Yamaha's motorcycle sales to become the fifth largest motorcycle seller in India. It has been refreshing its portfolio through launch of new models as well as colour options.

Suzuki India Market Share Trends

Suzuki India has experienced marginal reductions in market share over the course of the time period analysed. The highlight of 2016 for the company was that it turned profitable for the first time since the start of its operations ten years ago. Going ahead, it wants to launch one product per year in the country in the premium space. 

Mahindra Market Share Trends

Mahindra Two Wheelers Limited can be seen to have a market share of 0.33% in the Apr-Nov 2016 period. It can also be seen to be losing market share in the period depicted in the graphics. Various factors have been blamed for the company's under-performance, such as a lack of focus on cost-reduction and weakness in marketing.

The remaining small players don't command any significant market share between them and can be ignored. I now proceed to the summary of this blog post.

Summary

To sum up:

1. There are clear-cut leaders with a large margin of dominance in both the scooter and the motorcycle segments. While in the former it is Honda, in the latter it is Hero.
2. Hero, however, has been losing market share, which is blamed on its inability to excel in R&D on its own, without Honda, its erstwhile technology partner. Various steps have been taken by Hero to alleviate this and their results are awaited.
3. Honda, on the other hand, is gaining market share on the strength of its existing products in the scooter segment, where it is strong, and new launches in the motorcycle segment, where it is yet finding its footing post demerger with Hero.
4. TVS, whose best-selling two wheeler is a moped, is hoping that its new launches in the motorcycle and scooter segments will help it continue the increase in its market share.
5. Bajaj's market share gains have been capped by its weakness in the 125 cc commuter category where its Discover range has under-performed.  It's betting on its new offerings in the value segment and the premium segment to help it race ahead in the times ahead.
6. Among the smaller players, Yamaha and Royal Enfield have been growing their market shares well, through performing well in the non-commuter categories that they inhabit. Both have introduced promising new offerings in 2016.
7. Suzuki and Mahindra have been struggling to find their footing amidst the entrenched competitors and the hyper-competition. Both claimed to have made improvements recently and are optimistic about the future.

Market Share Analysis of Three Wheeler Market in India

After having covered the market share trends in the passenger and commercial vehicles industries in India, I now turn my attention to the three wheeler industry.  The three wheeler industry can be divided in to the passenger and the goods segment. In FY15, the passenger three wheeler market was 80% of the total three wheeler market and the goods market was obviously the remaining 20%. The former had grown by a little over 8% in the previous decade while the latter had declined by a little over 4% during the same period. The growth of the passenger category can be attributed to a multitude of factors including increasing need for last-mile connectivity with the advent of metro rail in various cities, increasing urbanisation and associated mobility needs, entry of app based aggregators in to the market and decreasing price and increasing adoption of CNG as a fuel. The following graphical elements sum up the market share trends in the April to February time periods of FY15 and FY16. Data taken from an article available online.

As can be seen clearly from the pie chart, the top three players dominate the industry with a whopping 87% market shared between them. Bajaj Auto is the clear leader with a dominating 47% market share with it. Piaggio provides decent competition with a 30% market share and M&M has a lot of ground to cover if it wants to provide serious competition to the two ahead of it. Now I seek to understand the OEM-wise reasons for the market share patterns.

Bajaj Auto Market Share Trends

The graphic below shows the change in the market share of Bajaj Auto in the domestic three wheeler market in the past three financial years. The numbers have been taken from Bajaj Auto's FY16 annual report.

It can be seen that the industry has been growing and that Bajaj Auto has increased its market share in it. In FY16, release of three-wheeler permits in several states helped grow the company's sales. The company had a market share of 90% in the petrol and alternate fuel driven three wheelers. In the small diesel market too it dominated with a 65% market share. In the large diesel category, however, it was a laggard with only 20% market share. After entering the cargo segment in FY 2016, Bajaj has clocked double digit market share in that segment, further growing its presence in the three wheeler segment.     

Piaggio Market Share Trends

Towards the end of FY14, Piaggio Vehicles Private Limited (PVPL) wanted to achieve a market share of 40% in another three years, which then was a t 31%. As of FY16, it had not grown its market share by much at all, staying close to 30%. At one point, Piaggio had snatched the leadership position from Bajaj in the three wheeler segment by making strong gains in the cargo segment, but Bajaj has reclaimed its leadership position through competing offerings. However, in the goods sub-segment of three wheelers, Piaggio sold more than all others combined, even as late as Q1 2015. In the passenger segment, they had launched a new product the Ape Xtra Dlx which had some new features to make it look stylish and modern. However, year on year market share changes show a decline despite these efforts. 

Other Players Market Share Trends

Between Bajaj and Piaggio, we have covered three-fourth of the industry. The rest can be discussed together. M&M has a market share of 10% in the segment, marginally lower than the share the year before. It has historically tried innovative things like making an electric three wheeler in 2002 and a hydrogen powered three wheeler in 2012. As of now, however, competency in diesel, petrol and CNG rules the roost, if market share trends are to be explained. 

Atul Auto has been growing its market faster than all the others, if you adjust for the fact that it has the smallest market share of all the players with a greater than 5% share. In 2014, it was using its debt free balance sheet to drive expansion of production and aiming to achieve a steady 20% increase in sales year on year. It has been opined that competitive pricing is the key to Atul Auto's expansion when compared to the other players.

TVS entered the three wheeler segment around a decade back. Its weak competitive positioning is reflected in the fact that while sales in December fell by 8.5% year on year, for the company overall, three wheeler sales fell 32.8%. In the graphics in this post, it can also be seen losing market share in the the previous years. The management has brushed aside this under-performance saying that it is not a core business for the company

Scooters India manufactures exclusively three-wheelers. It can be seen to be the biggest loser of market share when the small base or denominator effect is adjusted for. It is a Government enterprise and due to the poor performance, its sale is being considered.

Summary

To sum up,

1. Bajaj Auto has the market leadership position and is one of only two players increasing their market share. Its only weakness is the large diesel segment, where it is looking to expand.
2. Piaggio has had fluctuating fortunes and has failed to live up to its expectations, but does well in the cargo diesel segment.
3. Atul Auto is expanding aggressively and can be called the dark horse in the race. It is the other player apart from Bajaj Auto which has increased its market share in the period under consideration.
4. M&M is also a large player and has been holding on to its market share. However, its novel alternate fuel products have not found much traction in the market.
5. TVS' three wheeler division and Scooters India are in trouble and what happens to them remains to be seen.