Attract|veness of Automob||e Industry for keta|| Investor

AuLomoblle lndusLry has been showlng a Lremendous growLh ln Lhe pasL and as dlscussed ln Lhe fuLure
ouLlook has a Lremendous poLenLlal for growLh 1he expecLed growLh raLe ln Lhe long Lerm ls 13 whlle
Lhe lmmedlaLe growLh expecLed ln 2011 ls more Lhan 13 due Lo cycllcal naLure of Lhe lndusLry lrom
Lhe pasL Lrends we have done a regresslon of Sales flgure and LS flgure of Lhe secLor on Lhe 8SL AuLo
lndex whlch ls a markeL lndlcaLor of auLomoblle lndusLry

As we can see LhaL boLh Lhe regresslon are falrly slgnlflcanL and 8SL AuLo lndex lncreases wlLh a growLh
ln sales and lncrease ln LS 1hus Lhe lmmedlaLe lncrease ln Lhe value of Lhe secLor ls on Lhe cards and
also a long Lerm lncrease ln prlce ls expecLed due Lo Lhe sales growLh ln Lhe secLor lrom Lhe above
regresslon we can calculaLe LhaL 1 lncrease ln sales would LranslaLe Lo 1 lncrease ln Lhe 8SL AuLo
lndex whlch ls equlvalenL Lo 1 caplLal galns 1hus wlLh a growLh raLe of more Lhan 13 ln Lhe expecLed
fuLure Lhe mlnlmum caplLal galns of more Lhan 13 can be expecLed from Lhe AuLo secLor AparL from
Lhe caplLal galns also Lhe dlvldend yleld ls Lhe addlLlonal componenL 1he Lyplcal dlvldend yleld of AuLo
secLor ls abouL 26 (Source hLLp//wwwlndlalnfollnecom/MarkeLSLaLlsLlcs/ulvldend
?leld/AuLomoblleSecLor)
WhaL reLurn does Lhe shareholders expecL from
Lhe AuLo secLor wlll depend upon Lhe 8eLa of Lhe
secLor 1he beLa of Lhe secLor ls calculaLed by
regresslng MarkeL reLurns wlLh 8SL AuLo reLurns
over lasL 6 years 1he beLa found by regresslon ls
0939 1he Lyplcal rlsk free raLe ln Lhe markeL as
on March 2010 ls around 78 and Lhe markeL rlsk
premlum ls around 723 1hus wlLh a beLa of
0939 we arrlve aL a cosL of equlLy of 13

Also lL ls seen Lyplcally ln auLo secLor LhaL Lhe proflL generaLed ls very well LranslaLed lnLo cash 1hls can
be proven from Lhe graph below whlch shows a raLlo of CClC/A1 over lasL 6 years 1he value ls
y 0043x + 84363
8 09136
0
2000
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0 100000 200000
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Sa|es (ks Crores)
Sa|es vs 8SL Auto
y 2618x 93334
8 08691
0
2000
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6000
8000
10000
40 30 60 70 80
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LS (ks)
LS vs 8SL auto
y 09S93x 00016
k 07888
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02
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04
04 02 0 02 04
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Market return
osclllaLlng wlLhln a very small range around 1
whlch lndlcaLes LhaL Lhere ls no llquldlLy lssue ln
Lhe overall secLor 1hls can be also relnforced
from Lhe facL LhaL Lhe average cash converslon
cycle of Lhe secLor as a whole ls negaLlve whlch
lmplles LhaL Lhe bargalnlng power of Lhe
auLomoblle lndusLry ls very hlgh wlLh lLs
suppllers and Lhus Lhey are able Lo exLracL
longer credlL Lerms from Lhe suppllers Cn Lhe
Lop Lhelr lnvenLory converslon and debLor days
are less due Lo sLrong lnLernal managemenL and
bargalnlng power wlLh Lhelr buyers




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2004 2006 2008 2010
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