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.