Was listening to Indusind concall yesterday. They have a CV portfolio of about 19% of their total book, and including small CV and utility vehicle loans, it is 27%.
They have seen a gradual increase in the NPAs in the CV portfolio from around 1% to 1.3%. However, they sounded positive on the future and expect these levels not to worsen by more than 5-10 basis points. Expected turnaround is 3-4 months after elections ie around Q2-FY15. However, in my view, the market may start discounting it earlier. They indicated that they are seeing some sign of month on month improvement in Dec, albeit it is only 1 month. Generally Q4 is a better period for this sector in their opinion.
If the financier is expecting a revival, the story could be better for end users. There are some CV players we could look at as turnaround plays.
Tata Motors - is the largest player. It is firing on all cylinders on the JLR side, with the outlook being generally positive for this part of the business. China, Europe, USA are expected to post better growth next year and the signs are visible with all the global auto majors posting better numbers last couple of quarters. Compared to this, the domestic CV business is a small part (currently 10-15%) and largely due to the local slowdown. This is a drag on the overall business. The profits, cash, return ratios etc of Tata Mot have been held up by the JLR numbers. The standalone financials (CV plus ancillary) is dismal. The co. appeared in the recent Motilal Oswal wealth creation study where the increase in the stock price relative to the increase in the net profits over the last 5 years has been very less.
Ashok Leyland - This is the 2nd largest CV player and is only into CVs. Owned by Hindujas. Exports are to developing nations currently (SAARC, Gulf, Africa etc). But this is entirely a domestic play. They have 50-50 JVs with Nissan and John Deere. Even during the slowdown they have been making investments in the business - in their above JVs and in their foundry subsidiary which supplies to them. They have a very strong rural distribution network especially in the South. They have been selling non core investments (eg in Indusind bank) to generate cash to reduce debt and increase core investments. They have posted very poor operating profits and net loss (excl. other income) in the last 2 quarters. Average utilisation is 20-30% and there is a fair level of operating leverage possible in case demand improves and production increases. It is available at 5000 cr market cap even after the current run up and looks to be the cheapest stock available. Another positive aspect in its favour is that the entire investment expert community is negative on it
The third stock I have in view is Eicher Motors. While the bikes business is in the limelight, the CV portion is the real kicker in my view. They have 50-50 JV with Volvo and have also invested a lot in this notwithstanding the slowdown. Like Ashok Ley, they have also a slew of launches ready for the coming months. Volvo is planning to use this as their global souring hub for engines and parts, and thus Eicher, like Tata Mot, has an element of international recovery play going for it. Valuations look on the higher side though.
Would request knowledgeable boarders to post their comments on any investment candidates in their radar in this sector.