Sunday, 5 March 2017

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.    

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