The Covid-19 pandemic hit hard automobile companies around the world. India wasn’t an exception. However, the automotive industry is recovering as we witness phase-wise openings driven by increased vaccinations. Few stocks in this sector have the potential to generate decent returns in the medium term. We picked two stocks in this space—one in the auto industry and the other in the auto ancillary sector.
1. Force Motors Ltd (NS: FORC )
Formerly known as Bajaj Tempo Ltd, Force Motors is an automotive manufacturer managed by the Firodia group. Apart from manufacturing light transport and utility vehicles, the company produces engines & axels and a large variety of die-cast aluminum parts. Notably, it is our country’s largest mass transport vehicle maker. The company supplies engines and axles to renowned names such as Mercedes and BMW. Force Motors has a leadership position in a school bus and ambulance segment with over 70% market share.
FML is a leading supplier of low-cost mobility vehicles. The group has recently acquired Volkswagen’s MAN trucks manufacturing plant. It has also signed a joint venture with Rolls Royce (LON: RR ) Power System AG to manufacture high-powered diesel engines. The company is focusing on niche passenger segments along with the steady launch of new products and variants. Covid-19 pandemic forced the state governments to improve their healthcare infrastructure. As a result, the ambulance segment of FML is witnessing growth. They have modified their most popular brand, Trax vehicle, as the best value for money patient transport ambulance. New premium van and growing exports should push the company’s top-line.
Force Motors’s financial performance improved in June 2021 quarter. Sales were Rs 643.33 crore as against Rs 185.40 crore in June 2020 quarter, translating into 247% year-on-year growth. EBITDA for the quarter stood at Rs 51 crore compared to Rs 44 crore a year ago. In Q1FY2022, FML registered a sales growth of 172% in the domestic market and 243% in the export market. The share price is bottomed out from its high and currently trades at a 22.4% discount to its 52-week high of Rs 1707.
2. Motherson Sumi Systems Ltd. (NS: MOSS )
Motherson Sumi Systems is one of the largest auto ancillary companies in India. It is also one of the world’s leading specialized automotive component manufacturers for OEMs. The company’s product range comprises wiring harnesses, rearview mirrors, and molded plastic and rubber parts for automotive and industrial applications.
Motherson Sumi’s 98% businesses are linked to the automotive industry. The company has a strong global presence with over 270 facilities in 41 countries. While the auto industry remains the key focus area, MSSL targets revenue from non-automotive industries such as aerospace, logistic solutions, technology & industrial solutions, and health & medical. It aims to generate 25% revenue from these sectors by 2025. Motherson is scouting for potential acquisitions in Europe and North America for its aerospace business. Strong order book from the auto sector and diversification in new businesses should augur well for the company.
MSSL reported solid numbers in the quarter ended June 30, 2021. Its consolidated revenue from operations jumped 98% year-on-year to Rs 16,712 crore in Q1FY2022 as against Rs 8,431 crore in the corresponding quarter of FY2021. Consolidated net profit was Rs 290 crore in Q1FY2022 compared to a net loss of Rs 810.45 crore in Q1FY21. Motherson’s 5-year revenue CAGR remained at 9.2% as against the industry average of 6.4%. FIIs marginally increased stake in June 2021 quarter. Promoters’ share pledging reduced to 3.69% from 4.21% in March 2021, and their stake remained constant at 61.73% over the last few quarters. The share returned 95% in a year, 30.3% year-to-date, 4.4% in five days. Currently, it trades at a 21.6% discount to a 52-week high of Rs 272.85.
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force motorsWeak Long Term Fundamental Strength with a -187.30% CAGR growth in Operating Profits over the last 5 yearsCompany's ability to service its debt is weak with a poor EBIT to Interest (avg) ratio of 0.32The company has been able to generate a Return on Equity (avg) of 4.04% signifying low profitability per unit of shareholders fundsLike 0