The Hindu Business Line : Auto sector: First-gear sales, top-gear valuation

AUTOMOBILE stocks are at the forefront of the market rally, which is interesting considering that the growth rates in important segments of the industry are cooling down. Is there something the market knows that we do not?

Sales of trucks and passenger cars in the first seven months of this fiscal have grown by less than 10 per cent. This is less than half the pace of sales growth seen in the same period last year.

While growth in sales of heavy commercial vehicles (HCV) has been flat, passenger car sales have moved up 7 per cent. Sales of light commercial vehicles have been excellent and largely due to the tremendous success of the sub-one-tonne Tata Ace, introduced in May.

Tata Motors has, however, been facing a tough time in the HCV segment, where its sales declined 7.6 per cent in the April-November period. Competitor Ashok Leyland's sales grew in the same period but it must be pointed out that the company's sales last year were affected by labour problems at one of its factories. Therefore, the growth rate could appear artificially higher.

Despite this, Ashok Leyland has been doing better than Tata Motors in the HCV market in the first seven months of this fiscal. While the former grew its market share in HCVs to 28 per cent from 23 per cent, Tata Motors' share dropped from 67 per cent to 60 per cent in the same period. The impending entry of the Tata Novus heavy truck, unveiled recently, from the Daewoo stable could stir up the market a bit at the upper end, where Ashok Leyland has a strong presence.

There is a perceptible slowing in domestic passenger car sales with market leader, Maruti Udyog, despite the success of its Swift, unable to push growth into the double-digit.

Maruti's domestic sales grew 7.3 per cent in the April-November period. Maruti Udyog's growth pangs are largely due to the declining fortunes of its popular M-800 model. Sales of the 800 fell 30 per cent in the April-November period.

Schemes such as free petrol for a year or the 1 per cent finance scheme offered on the Toyota Innova only underline the tough times in the car market.

The Innova attracted a lot of interest when it was launched early this year. Ford has been attempting to whip up interest for its new Fiesta model but it is early days yet to say whether its efforts have been successful. So, returning to the first question, why are automobile stocks buoyant when sales growth is slowing down?

The stock market always looks at the future and, viewed from that perspective, the optimism is probably justified.

Just look at the positive factors. The economy is beginning to boom, with a growth of 8 per cent registered in the second quarter; the busy season for the economy is the second half of the fiscal and we may well see growth topping the 8 per cent mark for 2005-06.

The monsoon this year has been one of the best in recent times and a good crop will put money into the hands of the rural populace.

This is good news as much for commercial vehicle manufacturers (increased grain movement) as for two-wheeler companies.

Consumer confidence is high what with the boom in the stock market and the rising salary levels.

This must be cause for much optimism among passenger car manufacturers. The slowdown may well be in the short term, and sales could rebound soon.

Besides, it is too much to expect the car market to grow at 20 per cent and above for three consecutive years; it had grown by 18 per cent and 27 per cent in 2004-05 and 2003-04 respectively.

The market will have to pause for breath before gathering steam again. That is probably what is happening now.

The booming economy, therefore, appears to be the justification for the market's optimism for automobile stocks. That, for a change, is optimism well founded.

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