• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

S. Muralidhar

HAS the recent fall in stock prices of passenger vehicle manufacturers made them attractive again for investors looking for a bargain?

The answer clearly lies in the long-term prospects of the three listed passenger vehicle manufacturers, since most short-term growth parameters have already been factored into the stock prices.

Investors who are planning to add these three companies to their portfolios will have to factor in the risk of some downside on the lines of the broad market trends.

However, though the stocks of the three listed vehicle manufacturers — Maruti Udyog Ltd (MUL), Tata Motors and Mahindra & Mahindra (M&M) — have more than doubled from year-ago levels, they continue to show good upside potential for the long term.

Going forward, new product strategies and their effect on sales volumes, and an improvement in profitability through better manufacturing efficiencies will be the only growth drivers for their stock prices.

This will be even more keenly watched as all the three passenger vehicle makers will have to make large investments during the next two years to bring new vehicles into the market and to increase their production capacities.

What are the factors that will influence the performance of these three companies?

Maruti Udyog: MUL's prospects are a lot clearer now than they were a few months ago. With the proposed new diesel engine plant and the planned fourth assembly plant nearby at Manesar in Haryana, the company could continue as the dominant manufacturer in the passenger car industry.

The planned new plant will raise rated capacity to over 8 lakh cars per annum. The new plant is expected to go on stream by 2006-07. Last year, MUL produced over 4.7 lakh vehicles and the capacity of the existing three assembly lines can take the total production up to six lakh cars.

The pointers that make investing in the MUL stock a safe bet in the long run include the diesel engine plant, which will have an initial installed capacity of two lakh engines per annum, and the two new cars (one of which will be a premium small car) that the company plans to roll out during the next two years.

In addition, new variants, including a completely revamped Esteem, are being readied for launch later this year.

The significance of the diesel engine plant becomes evident if one considers the market dynamics. Currently, about 17 per cent of all passenger car sales are for diesel-driven vehicles. So, effectively MUL's market share (since sales of its diesel-driven variants of the Zen and Esteem are negligible) is over 50 per cent of only the remaining, petrol-engined 83 per cent of the car market.

With sales of diesel-engined vehicles projected to grow faster, MUL's new engine plant, which will produce new generation common-rail injected diesel engines in technical collaboration with Adam Opel (part of GM) and Fiat of Italy, will enable the company to capture a sizeable chunk of the diesel market.

Also, by 2007 MUL would have also developed and launched a new, India-specific small car that would be completely designed and manufactured in-house.

This fiscal, Maruti's production will almost equal its parent Suzuki's domestic car sales in Japan.

Tata Motors: In a study conducted in 2003, autoPOLIS, a UK-based consultancy firm that offers analysis and strategic advice for the automobile industry, projected that by2010 Tata Motors' share of the total output of the global automotive industry will be 1.2 per cent. Currently, the total production of passenger vehicles by all Indian manufacturers only constitutes about two per cent of the total global output of 52 million vehicles.

It was not mentioned in the study, but what seems to be implicit in the calculations projecting Tata Motors' production for 2010, is the successful development and launch of its proposed entry-level small car or the Rs 1-lakh people's car.

Apart from new variants and possibly a new utility vehicle, Tata Motors' efforts towards developing future new vehicles will be largely focussed towards the so-called people's car. While this vehicle will have the ability to redefine the small-car segment and may be capable of generating enormous volumes for the company, it will also greatly impact the company's financial performance.

If Tata Motors decides to develop and contract out the manufacture of this entry-level car, as Mr Ratan Tata is supposed to have said, then the company could potentially benefit from a sudden surge in volumes in a very short time.

However, if manufacturing is done completely in-house, the investments involved will be high and the ramp-up in production volumes slow. Profit margins from such a product would also tend to be lower than the current averages for its other cars.

Mahindra & Mahindra: M&M is uniquely positioned to take advantage of the increasing preference for utility vehicles among fleet operators and the urban individual vehicle buyer. The company's traditional dominance of the utility vehicle segment enabled it to completely develop and manufacture the Scorpio in-house.

Full-year sales of the Scorpio were reflected in the company's books only in 2003-04. The vehicle has been singularly responsible for dramatically improving M&M's profitability. With a 43 per cent increase in sales of the Scorpio, the company's net profit margins have improved by over 80 per cent compared to 2002-03 levels.

Going forward, new variants of the Scorpio and a new sports utility vehicle will be rolled out by M&M, even as it continues to break new ground in the three-wheeler segment. While its margins will continue to be under pressure, the company can ease a part of that strain on profitability by entering into contract manufacturing for overseas manufacturers.

However, for M&M, sales volumes this year will continue to come from the Scorpio and its proposed variants. In the next two years, even if the tractor division does not contribute substantially to the company's bottomline, its overall performance will continue to be boosted by the automotive division.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment Quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line