As discussed even in earlier sessions it’s primarily the rising prices of steel, aluminium, copper and lead prices that has resulted in bringing down the production units to a screeching halt. No doubt these prices have cooled off at the moment, but it’s too late for those few closed production units to resume operations now. These being key raw materials for the auto industry can significantly reduce the cost pressure that has been eroding the margins of players in the sector for the past few quarters. Steel constitutes as much as three-fourths of input costs and the price of this raw material has corrected by 41% on per ton basis in the past six months.
Another significant reason, for this slow down is contraction of loans from banks. There is not enough money available with the scheduled banks at present, for offering loans to all sectors of trade industry. Please note, Auto industry is one such component which entirely depends on Hire Purchase agreements by partnering with reputed banks. So a contraction in such agreements, will force the management team of Auto companies to postpone all new orders which leads to closing down of production units. The most recent one to bite the dust in India was a production plant owned by Tata Steel in Jamshedpur & another sibling production unit owned by TATA motors.
Mind you, I have spoken about few premium companies who have substantially supported by banks even during down times such as the present one. But the plight of auto-ancillary industry is one segment that is speculated to take the maximum beating. Coz the work orders of ancillary industries are directly proportional to work undertaken by Auto Manufacturing industry. It’s just like, if am manufacturing a car, the battery manufacturing segment becomes its ancillary.
What are the most probable events in a year, which are almost certain that, will certainly happen in the markets?
This question is something which I took it up myself to help our readers create a sense of view about the general market conditions based on our research. Yes, there are few things in our markets which will certainly happen & they are unstoppable, irrespective of how market is currently or how it may perform in future. More funds incomings seen for Mutual Fund Companies: - To know how far this fact could be true, you just need to get up from your desk & look around. How many of you or your friends have already started thinking which mutual fund do we invest in, coz as everybody knows this is the best way to get an Income tax waiver. This is something, which employees of all companies … irrespective of how big or small, the company they would be working for might be… irrespective of higher level or middle level or an entry level role, they occupy in a company… everybody needs to declare their plans for the financial year, and this exercise starts from November & ends in January every year with out fail & they are almost unstoppable.
It’s during these times, most people don’t bother to notice how good or bad their investment decision might prove to be in future, all that they would need & look for is a tax waiver. And also this is the time, when most mutual fund companies starts opening up campaign counters on your companies campus, so that they would get more people to drool in. This is the time of the year, when most MF companies introduces new public offers [NPO] with highly placed Net Asset Values [NAV] for their funds, purely to capitalize on the demand. Does this make the MF companies richer, off course baby it certainly does :). Would you be happy after getting a tax waiver? You should be right. :)
Auto sector slow down during November & December, also time when government usually reduces steel prices during these times: - This slow down phenomenon in auto sector during Nov-Dec, is something that’s been observed all over the world. Most people show sluggishness while buying vehicles during Nov-Dec, as the re-sale value of these vehicles will get lower… since the calendar flips to the next year immediately after two months of purchase. If you are a careful observer, you will notice – most auto sector companies try to hard sell their products by giving massive discounts during this time … but mind you, this offer comes with a catch - you can book now & but the delivery of your vehicle will only be next year.
This usually happens, since Auto sector reduces production of units during this time of the year expecting a rate cut in steel prices from the government. So that they can begin a new fleet of production units, by taking maximum advantage of reduction in prices of steel. That is one reason, most Auto sector units shuts its plants during this time of the year, for a holiday season. So this is one such time, you should probably keep in mind while trading with Auto sectorial stocks…
Many big companies have fallen massively over the time now, almost down by 75% from their previous highs. How do you analyze, a buying opportunity at this stage?
Absolutely, it makes me buy them to. In fact, current stock prices of few companies looks more seducing than an Item number in Bollywood. This is an industry wide recession & it is a great chance to buy few companies at throw away prices. But, yes there are few evaluations you need to do, before you set your foot forward to buy them.
Always know that, even brilliant companies do stupid things & when they do it, they loose some big time money. Nine out of Ten times [9/10], the stock market upon seeing this will slam that company’s stock.. i.e panic selling factor creeps in & everybody just sells even realizing what the reason is. Now, as a buyer this is the time when you should think using little logic & I am sure each one of you can do this. Your job is to figure out whether, if the reason that bought down the company is just due to a natural stock market calamity or an irreversible damage to the company’s stock.
Natural Stock Market Calamity: Okie, by telling natural stock market calamity I mean… let’s consider this example: There was a rumour surrounding ICICI bank, that the promoters are expected to sell of their stake & this can bring their stock prices down. This rumour impacted the banking sector in such a way that, even most stable banks in the pack took a hard beating with sudden selling pressure, apart from ICICI bank. Now this is something, that is quite natural in the stock markets & thus the other banking stocks were back with a bang to normalcy. This is what I sometimes call “Natural stock market calamity”. This is a clear “Buy” signal.
Irreversible Damage: Just as the word suggests, the reason due to which a stock falls is something … that makes you feel that it can never get back to where it was. Okie, I don’t want to take names of companies but if you are good at guessing you could try. These are kind of companies where suddenly one gets to know that, the profit margin within which the company was operating has suddenly reduced & thus the company is expected to face severe losses. Also could be, the natural resources which the company was dependent on all this while.. is now going to be extinct in the next 1 years time. See, such reasons which bring down the company & its stock prices .. is something that cannot be changed in short time or most of the times, a change of work plan is impossible. This is a clear “No Buying” zone.
What is the news about bio-fuel in India which is gaining prominence off late, What impact does it have on Sugar Industry going forward?
This is absolutely a fantastic programme taken up by the government of India. Infact this project has already been implemented in few notable places of the world including the US. If you guys could remember, there was anarticle in our publication about this policy at the time when global crude oil prices had peaked out above $140/barrel. It was due to implementation of this policy that forced US to cut down the exports of “Corn Seeds” globally, that prompted for a cold war between major crude oil refining nations around the world, which ultimately gave way for unfair trade practices in crude oil prices. Mind you, corn is an prime ingredient during refining stages of crude oil & US is the largest exporter of corn in the world. Now you know, why Big Daddy wanted to celebrate Diwali in Iraq so badly :).
Okie back to Indian Sugar Industry. As the government is becoming proactive in promoting bio-fuel programme in the country, the sugar industry is eagerly waiting for a reduction in excise duty on molasses, which is currently high at Rs 750 a tonne. The sugar industry has also sought for placing ethanol in the "special category of goods" under clause 5A of the Central Sales Tax Act, so that the state governments will not impose local taxes on this commodity.
At present, there is a provision for mandatory doping of auto-fuel with 5% ethanol throughout the country, with the exception of the northeastern region and hilly areas. All states except West Bengal and Tamil Nadu have implemented the 5% mandatory doping programme. The government has plans to increase ethanol doping to 10% from October 2008. The government has also allowed the sugar mills to deploy appropriate technology to source ethanol directly from sugarcane juice instead of following the molasses route, which is costlier. Molasses, a byproduct of the industry, is processed into ethanol.
All queries could be directed to Analyst@theclubsharewala.com. Topic on US economy is wide opened for everybody to comment up on. Please write to us, if you had a different view on this or if you felt that this issue has another phase which is never seen.
