Hot or Not? Automobile Sector on a slippery road!

It is a well known fact that automobiles form an integral part of every economy. Automobiles are very essential for the movement of men and material. In India, automobile industry has come up a long way. 25 years ago, only upper middle class people could afford to have a motor cycle. The rich people could possibly have a car. But today, the scenario has changed and even middle class families own a car. Let us now analyze the automobile sector from the stock market point of view. We will discuss the BSE Auto Index as well as some popular stocks.

The BSE Auto Index:

The BSE Auto Index has a free float market capitalization of Rs.81,458 crores and 17 constituent stocks. Bajaj Auto (weightage: 17.91%), Tata Motors (17.57%), Mahindra & Mahindra (also known as M&M, 15.19%), Maruti (12.24%), Hero Honda (7.67) are the top 5 in terms of weightage. It may be noted here that these stocks are also constituents of Nifty.

In the weekly chart displayed below, a “double top” formation can be observed. During May 2006 the auto index reached a high of 5844. Within about one month, it fell to a low of 3960. In February 2007 it once again made a high of 5882 but could not close above its previous high. Between May and July this year, a similar double top pattern was formed and the index has broken its support as can be seen from the chart. These indicate that the Auto Index is bearish. The next supports are at 4073 and 3960.

Chart Courtesy : BSE

Top Auto stocks:

These can be classifed into 4 categories viz.

• 2 and 3 wheelers (Bajaj Auto, Hero Honda, TVS Motor etc.)
• Light Commercial Vehicles (LCV) and Heavy Commercial Vehicles (HCV - Ashok Leyland, Tata Motors etc.)
• Passenger cars (Hindustan Motors, Maruti Udyog)
• Tractors (Escorts, Punjab Tractors etc.)

Two and Three wheelers:

Scrip	5 year return %	Recent Loss %
Bajaj Auto	402.36	(33.16)
Hero Honda	122.87	(31.66)
LML	(63.90)	(79.94)
Maha. Scooter	269.97	(41.23)
TVS Motor	23.89	(68.35)

LCV’s / HCV’s:

Scrip	5 year return %	Recent Loss %
Ashok Leyland	244.97	(33.65)
Eicher Motors	359.27	(17.90)
Swaraj Mazda	334.38	(28.37)
Tata Motors	371.84	(35.70)

Passenger Cars:

Scrip	5 year return %	Recent Loss %
Hindustan Motors	208.64	(57.45)
Maruti Udyog	236.70	(21.88)

Tractors:

Scrip	5 year return %	Recent Loss %
ESCORTS	51.29	(46.39)
HMT	127.38	(44.11)
M&M	1,268.71	(37.69)
PUNJABTRAC	56.31	(32.07)

Possible causes of the weakness in automobile sector:

• Increased interest rates
• Excess inventories
• Increasing competition

Mahindra & Mahindra, TVS Motors, Punjab Tractors, Hero Honda and Bajaj Auto showed decline in their earnings during fourth quarter for financial year 2006 – 07 whereas Ashok Leyland and Maruti Udyog had more earnings than the previous quarter.

Let us now discuss the long term outlook for some important stocks.

Ashok Leyland:

The monthly chart of the stock is displayed above. Using Elliott wave theory, we can come to the conclusion that waves 1 through 5 are already over; corrective wave ‘a’ and pullback wave ‘b’ are also complete. Now the last leg of correction is in progress. The stock is on the verge of testing its 38.2% retracement levels. A bearish “three outside down” candlestick pattern has been formed. If 34.50 is breached on a monthly basis, we can expect a bearish target of 22.90 in the long term.

Eicher Motors:

As can be seen in the chart above, the stock is locked between 202 and 415 for almost 2 years now. Only a decisive monthly close above 415 with good volumes will move the stock further upwards. But a close below 202 will make the stock bearish.

Tata Motors:

Like Ashok Leyland, this stock is also in wave ‘c’. If it closes below 637 in monthly charts, it may have a bearish target of 415 in the long term. Note that the volumes were maximum during wave 3 in 2003.

Conclusion:

Long term investors can exit the automobile sector at every higher level. Medium term and short term trends are weak; so it is better to avoid these stocks. Day traders/future traders however, may go either way depending on intraday charts.

“Sectorwise” performance: myth or miracle?

Introduction:

In a stock exchange, several companies are listed. Some of them belong to a particular industry or “sector”. For example, in the banking sector there are several listed banks, public sector banks such as State Bank of India, Punjab National Bank, Indian Overseas Bank etc. Examples of private sector banks include Karur Vysya Bank, Kotak Mahindra Bank, Karnataka Bank etc.

In the popular financial newspapers, magazines and television channels we often encounter reports like “the sugar sector is performing extremely well”, “the media sector is on fire”, “the textile stocks are outperforming the overall market” etc. This essentially means that the stocks from a particular sector are wanted by the crowd strongly compared to some other sector. Why does this happen?

If anyone had been an active market participant, he would know what the normal stock market practice is.

1. Some people have their own ideas, they think the time has come to enter a particular stock or exit. They are “intution” based investors.
2. Few invest or trade based on others’ view or reports. There are hundreds of web sites and magazines offering investment advice, such as buy/hold/sell strategy. Some TV Channels allocate a time slot exclusively for this purpose.
3. Part timers believe in “buy on rumour and sell on news”. They somehow manage to get information from “reliable” sources and act accordingly. This may or may not work all the time.
4. People who know the risks and rewards of stock market, the professionals always try to analyze the market and form a strategy that suits them with regard to time frame and profit margin. These people are somewhat rare.

Usually, a stock runs up expecting some “good news” or “positive news”. For example, depreciation of rupee value could be a booster for the software industry since they will get more rupee for each dollar earned. The federal government may allow export of a commodity more than the usual quota or a company may acquire another well performing company. Example of “bad news” or “negative news” may include losing a lawsuit, loss of revenue due to changing business conditions, price increase of a certain commodity (such as aviation turbine fuel may be negative for airline sector).

People may have noticed that the stock may not go up as positive news was published in the media. This is because the stock has already run up expecting the news.

The stock price, usually goes up or down, whether in the short, medium or long term as and when this kind of situation arises. The demand can be seen for a stock when the crowd expects a positive news and a sell off can be witnessed when the crowd anticipates a negative news.

The daily chart of UTV Software Communications Limited is shown below. The stock ran up sharply from 179.55 on 01/11/06 to 278.65 on 14/11/06.

The following text is from NSE regarding this stock dated 08.11.06:

“The media had reports that News Corp may pick up a sizeable stake in UTV Software Communications Limited. The Exchange, in order to verify the accuracy or otherwise of the information reported in the media and to inform the market place so that the interest of the investors is safeguarded, had written to the officials of the company. UTV Software Communications Limited has vide its letter inter-alia stated, "Please note that the article is an independent story by the publication and did not emanate from any official press release from the Company. As regards the news article, 'News Corp eyeing sizeable stake in UTV', we have to say that, at present there are no such proposals having been discussed by the Board of Directors of the nature stated in the news report."

So the company did deny such rumours floating in the media. But few days later, more news came out, this time though, it was issued by the company itself: (Source: Corporate Announcments in NSE)

Dated 24.11.06:

“Utv Software Communications Limited has informed the Exchange that the Company has received the approval from Government of India, Ministry of Finance, Department of Economic Affairs, Foreign Investment Promotion Board (FIPB) unit granting its approval for the acquisition of the entire shareholding by The Walt Disney Company (Southeast Asia) Pte Ltd (Disney) in United Home Entertainment Limited (Hungama TV). The said entire shareholding of Hungama TV is being acquired by Disney at an enterprise value of USD 31.125 million”

Dated 27.11.06

“Utv Software Communications Limited has informed the Exchange that the Company has entered into a term sheet with Astro Multimedia International (BVI) Limited (Astro) for establishing a television channel joint venture business in India, South Asia and South East Asia. The scope of business of the joint venture company will be to create, develop, produce, own and operate one or more TV broadcast channels targeted at the age group of 15 to 25 in India, South Asia and South East Asia. The Company and Astro will hold 50% each of the equity capital of the Joint venture company. The aforesaid is subject to all regulatory approvals required for operating televisions channels in the territory being obtained and definitive agreements.”

Dated 08.12.06

“Utv Software Communications Limited has informed the Exchange that "The Company (1) Has entered into an arrangement with Indiagames Limited and its promoters for acquisition of controlling equity stake in Indiagames Limited, a Mumbai based mobile and online gaming company for a consideration of around Rs. 68 crores. (2) Has entered into an arrangement with Ignition Entertainment Limited and its promoters for acquisition of controlling equity stake in Ignition Entertainment Limited, a UK based company involved in developing console games for a consideration of around Rs. 60 crores. (3) Has initiated development of animation movie projects with total investments to the tune of Rs. 135 crores over a period of next three years.”

It can clearly be seen that the stock ran up expecting positive news. The story floating in the market place was obviously something different, but ultimately there was some news officially declared by the company.

The above was just an example of a particular stock moving up based on expectation of positive news. The sector wise movment was noticed between October 2003 and April 2006 in the same manner in sugar stocks.

The following table gives the stocks’ appreciation in sugar sector.

Scrip	Close 1	Close 2	Gain	Current
	30.09.03	28.04.06		Price
BAJAJ HINDUSTAN *	13.60	534.50	39.30	162.95
THIRU AROORAN SUGAR	32.80	598.70	18.25	121.15
SAKHTI SUGAR	22.45	252.10	11.23	88.70
KCP SUGAR INDUSTRIES *	2.68	73.75	27.52	18.00

* Adjusted close price due to stock split

So, what was the bad news in May 2006 that started the “steep” fall to the current levels?

http://in.biz.yahoo.com/061213/203/6a9mw.html says:

“…In response to the rising prices in the domestic market, the government had clamped a ban on sugar exports in July, 2006. The global prices were lucrative at at time, ruling in the range of $420 to $460 a tonne. The domestic price rise was due to a combination of several factors like hoarding and manipulation in the future markets and not due to shortage. Since the imposition of the export ban, the industry has been lobbying for its removal. The government had at the same time also allowed sugar imports against low duty, but no substantial amount has entered the country…”

It can be clearly seen that the market participants knew that the bad news was already on the the cards and decline started in May 2006.

Conclusion:

The news based buying or selling is not a great strategy for an ordinary investor. Rather, he should look for increasing his profits either by his own research or getting some qualified expert advice. News based rally never really lasts long.