In an interview to CNBC-TV18, Basudeb Banerjee, Antique Stock Broking shares his views on the auto sector and his preferred stocks going ahead.
Below is verbatim transcript of his interview: Q: What makes you so bullish on commercial vehicle (CV) cycle? What kind of growth do you see over the next two to three years?
A: Broadly, one expects that our economy is on a revival path back from those 4.5-7 percent levels. You can’t see an economic recovery without CV industry going back to the positive growth territory.
If you see FY13-FY14 CV vehicle industry contracted by almost 25 percent each year. Even if you take a similar 25 percent compounding in next couple of years the volume won’t even reach back to the FY12 levels, whereas your economy is on a revival path, your highway addition is ramping up.
In the last two years the capital expenditure (Capex) cycle across industries was at a dismal sub one percent growth Gross fixed capital formation (GFCF). So those things on a reviving mode will definitely come along with the CV cycle recovery.
If you see the long-term, last one decade, GFCF in India is close to 10 percent. In the last couple of years it grew only by one percent. So, the correlation factor of real gross domestic product (GDP) growth with GFCF is pretty high. We are confident that overall capex cycle revival should happen which will bode well for the CV demand.Q: What is the current CV inventory in the system? By when do you expect it to get completely absorbed?
A: As per our channel checks, around one year back almost 50 percent of the systemic trucks were lying idle. Fleet owners were reducing their size selling back those trucks to the financiers. That situation has started improving from June of this year and presently the unused truck inventory in the system has come down to 25-30 percent levels from 50 percent levels.
The corresponding impact on new truck sales from June onwards has improved quite a bit from overall industry sales of 13,000-14,000 per month. Presently, it is around 18,000 per month.
So, a part of that growth is due to base effect where you see companies like Ashok Leyland reporting 80-90 percent growth which is primarily because of low base. But overall, systemic inventory has come down and in the next two quarters the remaining 25-30 percent will also get absorbed and post that the new truck demand will start picking up significantly.
Q: How would you approach a stock like Ashok Leyland which is already up 200 percent for the year?
A: There are a couple of reasons for the stock to do well and that includes, one, much better-than-expected reported margins in past couple of quarters in the entire industry despite high discounts. Leyland has surprised everybody on the street by reporting 5-7 percent margins whereas the leader Tata Motors is yet to become positive in terms of EBITDA.
Two, the capital raising where Leyland did the qualified institutional placement (QIP) and somehow managed to keep the debt equity under control, for Leyland on an annual basis Rs 400 crore of interest outgo and Rs 400 crore of depreciation. So, your threshold EBITDA margin requirement is close to 5-6 percent, only then the profit after tax (PAT) will be positive.
Margins being around 7-7.5 percent, interest outgo coming down and so, Leyland is on the verge of coming back to PAT positive territory and strengthen further. So that was the prime reason for Leyland doing well but that should not be a deterrent for investors to remain positive on the stock because the prime effect of volume recovery, prime effect of normalisation in discount levels which are at absurdly high levels compared to FY08-FY09 downturn.
Those two will be the prime drivers for cash flow improvement for a core CV play like Leyland in coming couple of years and typically in first two years of a CV cycle recovery the growth is as high as 25-30 percent. Under such scenario, your operating leverage will also benefit a player like Leyland in terms of margin improvement. So we are pretty positive even after Leyland having done well in past couple of quarters.
Q: What is your call on Eicher Motors? How would you play that stock?
A: Eicher is more of a Royal Enfield play rather than a CV play and in the last couple of years Royal Enfield has done fabulously well and we have been positive on the stock since Rs 1,000 levels. It has already become 15 times in the last four years and we are pretty much positive and in the CV front of Eicher Motors almost 95 percent of the portfolio.
The volume comes under the 16 tonne category and now is the right time when the cycle is at the cusp of recovery vis-à-vis launching across the tonnage segments under the brand pro-series. It is a pretty good timing though coincidental so that they can diversify their product portfolio.
Going ahead, with discounts not going to be a major pin point for the industry in the next two to three years they are playing the cards very well in terms of diversifying their product portfolio but the unfortunate part is despite the CV cycle recovery the truck business won’t contribute more than 15-20 percent of the overall earnings. So, Royal Enfield remains the prime driver of the business.
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