This is the seventh post in our quarterly update series for Q2 FY20.
In this post, we’re sharing the latest updates of the stocks from our watchlist. Please don’t treat this as a buy recommendation. We find these businesses interesting and we may build position (or buy more of those that are already in our portfolio) in them in the future. The purpose of this post is to bring clarity to our understanding of the businesses we are tracking. We make our notes on the quarterly results and conference calls. Putting it up here makes it easier for us to refer them at a future date.
You can see the earlier updates here.
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Please click on the read more button for more details on each stock.
Ashok Leyland has consistently proven itself over the years as the market leader in India for HCVs. They have remained resilient in the current auto market conditions and have pushed to maintain their margins and grow their market share organically. The company has been hit hard by the drastic volume decline in the LCV and MHCV industry and the high level of discounting prevalent in the industry. The fall in raw material prices certainly helped the company but this is just a temporary reprieve. Despite the dismal industry conditions, the company has done well to stay in line with their tech development plans and expect their new Phoenix platform to help them capture additional market share and expand export sales in the future. It remains to be seen whether the broad auto industry recovers as the company expects. Nonetheless, given the company’s resilient performance and its solid market positioning, Ashok Leyland remains one of the most dependable auto stocks in the country. Whenever the industry scenario improves, the company would be in the best position to take advantage and grow further.
Eicher Motors has been one of the highest-rated auto companies in India. This was mainly on the back of their successful turnaround of Royal Enfield and the emergence of the mid-sized (250cc-750cc) motorcycle market. Currently, the sales of the company have stagnated and margins have fallen a bit for the Royal Enfield and the VECV JV. The main cause for this has been the demand slowdown in the broad auto industry. The fall in volumes is less than the industry declines indicating the strength of the company’s brands. The studio initiative seems to be working well for the company and is expected to help provide penetration and support in underpenetrated areas in the country and enhance the company brand accessibility and reach. The export demand is also looking up for the company which highlights the demand and durability for the company’s brands internationally. It remains to be seen how long will it take for the company to get back to its growth path and whether it will be able to do so before the industry revival and steal a march on its major competitors. Nonetheless, based on its brand resilience and dominant market share in its segment, Eicher Motors remains one of the prime auto sector stocks in the country today.
KNR has been one of the top performers in the construction industry this year. Despite the industry headwinds and the general plight of the companies in this sector due to delay in payments from NHAI, KNR has been able to clock an impressive 34% revenue growth while improving its margins substantially. The company has done well to maintain a healthy balance sheet to be able to compete effectively while bidding for attractive projects and have seen good success in bagging high margin irrigation projects. Furthermore, the management is optimistic that NHAI will be handing out a greater number of projects in the near future. It remains to be seen how long the company can manage to maintain its current margin profile which is among the best in the industry. It also needs to be seen whether they will be rewarded in time from the increased number of projects handed out by the NHAI. Nonetheless, given the company’s spectacular performance so far in FY20 and its robust balance sheet, KNR remains one of the best construction stocks to watch out for.
Mahindra & Mahindra
Mahindra & Mahindra are the homegrown pioneers of the Indian Auto industry. They have perfected the art of making money on small volume platforms based on their expertise and low running costs. Despite the current auto sector slowdown, the company has performed resiliently and have shown their willingness to stay focused on the future. Diwali sales have been better than last year for the company and with the help of raw material cost reduction and a slight increase in selling prices, the company has been able to improve its gross margins. The challenges pointed out by the management of the unavailability of BSVI fuel remain out of their hand but hopefully, this will get resolved soon. Given the resilient performance of the company’s different segments, M&M remains a good auto sector stock to watch out for.
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