The Big Global boom facing the auto Industry!

The Indian automobile makers are set for a stupendous growth in exports over the next few years. Buoyed by their scale, cost and quality advantages the sector stands to grow by 32% CAGR in exports for the period FY06-Fy10. All the bigger auto companies Tata Motors, Maruti Udyog, Bajaj Auto Hero Honda, TVS Motor and M&M should benefit from this impending boom over the long term. The run up in their prices have disrupted the near term valuations but investors could wait to buy into these stocks as a part of their core long term portfolio.

Amongst the companies listed above the Bajaj Auto (multiple businesses) and Hero Honda (cheap valuations) appear to benefit more. M&M should also be a good pick.

Over the past three years, automobile exports have grown at a CAGR of 37.8%. The contribution of exports to total sales for Indian manufacturers has gone up from 4.9% in FY03 to 8.3% in FY06.

This growth has been rampant across all segments In Fy 10 exports should contribute 14% of total sales of the leading automobile manufacturers.

Leading automobile manufacturers of India have recently announced big-ticket capital expenditure and capacity expansion plans with an eye on the international market.

To cater to this strategy Bajaj Auto and TVS Motors are setting up independent manufacturing and distribution set ups in the target markets. Bajaj has already finalized markets of countries like Indonesia, Nigeria and South America (Columbia and Peru) under this strategy.

Tata Motors and Mahindra & Mahindra are setting up a series of JV’s while Maruti and  Hero Honda would not like to set up distribution chains but just serve as a sourcing base for the global majors.

Now it is not that the total targeted market will be tapped by 2010 but that is where we intend to be in about a decade. Meanwhile the growth in almost all these auto companies will be complemented by this huge scale of opportunity that is available.

As I write this there unconfirmed reports of Volvo eyeing a stake in Ashok Leyland and Daimler Chrysler looking to buy into Eicher Motors. Once there foreign companies pick up/ increase stakes in the Indian auto manufacturers these would be made outsourcing hubs leading to a there will be a huge flow in orders. This coupled with the technology the foreigners would bring to the table would make the Indian companies a fit case for rerating.

Conclusion: While the Automobile export segment is growing at 32% these high growth figures would not make that much of a difference to the companies listed above since these companies still derive a very small percentage of their sales from exports. So it would take time for these companies to actually benefit in EPS terms from the growth in exports. This opportunity just adds to the visibility in terms of available markets and also increases the sustainability of earnings.

Source: Companies and HSBC

Since the proportion of export sales to total sales is low this opportunity might not get reflected in terms of EPS growth very soon. WHat it brings though is the long term visibility for these auto makers - over a period of 3-4 years as the percentage of export sales increases these companies should command higher pE's as it would reflect risk diversification of some type.