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Not an analyst, but I've holdings in some tractor and engine companies and they've been doing very good since the last year or so. Looks like a re-rating is happening across the industry. @Smartcat, any views on this?

WOW..

What a thread.

Smartcat, you really justify the name.

I have bought just one company's share for testing since my demat account was opened,
LML at 7rupee, now it is at 12 rupee, got to know when I logged in to buy your shortlisted companies.

Indeed we can use our extensive automobile knowledge to better our portfolio.

How long should we hold to get good returns?
3-5 years seems reasonably good, considering the ROI.

What triggers should we define, so that we know it's a right time to sell a stock ( to be saved from loss)

Tractor and engine companies? Names?

"Hold for 3 to 5 years" is good advice only for those type of investors who like to identify undervalued stocks and exit overvalued stocks. Note that this requires years of experience to correctly identify such stocks. For others, buy and hold works best. However, 'buy and hold' investors need to closely watch certain parameters and exit their investments if needed.

WHEN TO SELL A STOCK:

• When the company makes a huge overseas acquisition - 80 to 90% of large buyouts destroy shareholders value.
• When interest costs rise up to 25% or more of operating profits.
• When the company stops paying dividend or reduces dividend payout ratio to below 15%. This is a sign that management is not confident about the company's future.
• Market share going down + Operating margins are falling + sales stagnant or falling. (Eg: Tata Motors Indian operations)

That way, Bajaj Auto and Hero Motocorp might be losing market share to Royal Enfield and Honda, but it is NOT a "sell" because their sales are increasing and operating margins are stable.

WHEN TO SELL CASE STUDY: AMTEK AUTO

Let's take a look at its 10 year P&L sheet -



The rows to look at are - Operating Profits, Interest costs and Dividend Payout Ratio - for each year. To begin with, the dividend payout ratio of Amtek Auto was only around 10%, which in itself is a bad sign. You should insist on atleast 15 to 20% dividend payout ratio.

But if you ignore this rule and still invest, remember to keep an eye on interest costs and operating profits. Note how interest costs are rising every single year, and rising at a faster pace than sales or operating profits. Year 2011 was when alarm bells should have been triggered. Interest cost at Rs. 290 crores was over 25% of operating profits (Rs. 1126 cr). I would have exited the stock.

Since 2011, the interest costs rose further and by 2015, was almost equal to operating profit. And the stock price crashed big time from Jun 2011 (Rs. 160) till date (Rs. 30).



Rise in interest costs without corresponding increase in operating profits is a car crash waiting to happen!

Hey smartcat

What you have to say about Amtek Auto Ltd?

Very bad shape, most of their plants are being sold to foreign collaborators. They are not paying vendors ( we are one )

That means no chance of revival? Then I should keep away, right?

Escorts, VST, Force, Swaraj engines, Swelect engines to name a few.. All of them have done exceptionally well. Kind of like a re-rating for this segment.

Any opinion on Atul Auto Ltd? I am new to market and is still in studying phase actually.

Not my opinion but HDFC research recently issued a report in favour of the Company. I think it's a decent stock but the company showed slow growth last year and that's why its under pressure.

This is a great great great thread. I today actually understood share market. What and how and why and what to look for and what not. Other than the automobile sector , this i guess surely corelate to any other sector shares. But I have a naive question. How do you actually buy and sell these shares online? Any specific website / apps etc. What are the requirements for purely online trading. Sorry for a silly question. I have always been intrigued by this and want to invest and see how it actually works. Can anyone throw some light?

smartcat:Thanks for creating this thread. This is an eye opener for me.
Earlier, I just used to look at the price(and p/e) and invest. Now I know that I need to look into lot more parameters, and these websites are awesome.

great thread!

@smartcat

I would like to hear your views on shorting a stock.
Does this come under the umbrella of "Investing"

I used to do trade options a lot few years back and made quite a lot of cash with Puts.


-Vinay

Investing in these companies requires a different type of skill. I'd recommend that you stay away from Amteks, Bhushans and JPs of the world. I maintain safe distance from such names.

I used to own Swaraj Engines & VST Tillers long time back :)

PROS:

+ Three wheeler segment growing at 8 to 10% per annum (cargo + passenger)
+ No debt, good RoE & high dividend payout ratio
+ Long history of sales, profit & dividend growth.
+ Innovative company. Getting into electric vehicles space. Over the next 2 years, 10% of their revenues are likely to be from sales of electric vehicles.
+ Exports going up too. Currently, about 10% of the revenues are from exports.

CONS:

- Expensive valuations (again)
- Current market share is only 7 or 8% in three wheeler space


I'd recommend you open an investment account with either www.zerodha.com or www.icicidirect.com. Read the FAQ on their website.

Shorting a stock or dabbling in derivatives definitely does not come under the umbrella of 'investing'. I do sell call spreads on stocks I own to generate cash for stock investing and for my household expenses.

If somebody already has a job or a business that generates cash flow, it doesn't make sense to fool around in the F&O segment. Trading in derivatives should be treated as a "business", and not as a means of generating extra-ordinary returns. You need to thoroughly understand concepts of risk, leverage and returns.

I was also looking into this company and trying to identify what went wrong. I found many articles from 2015 when the crash actually took place. Business standard lists 3 reasons- risk of default, removal from derivative list and poor performance in the preceding quarter. I was not satisfied with this line of reasoning as they all seem to be reacting to a particular set of news. There are a lot of articles which seem to do a post mortem analysis of the company.

Smarcat's post above is the first time I am getting a sense of how to predict the game in the industry clap:. I was surprised that the stock was showing signs of distress in 2011, when the actual crash happened few years later.

There is also the case of high profile VC firms such as Warburg pincus and chrysCapital exiting the fund at different times. Amtek also seem to have pulled down JMT auto, the acquisition of which was completed in 2013. There is more to the current story of amteks collapse.

With the upcoming bankrupcy proceedings, I expect some sort of revival for the shares on the basis of any positive news. If the banks waive the loans on condition of a take over by a well placed rival , this stock can shoot up in the short run.

Let me introduce a new perspective of looking at potential gainers. This is just food for thought to open new ideas.

In the past, successful car models have impacted suppliers in a big way. Look at Rane Group which has benefitted from supplying steering and brake parts to Baleno, Swift and Brezza. Another auto component we recently discussed was PPAP which supplies rubber beadings to Maruti's successful models and Innova-Fortuner twins.

A good way to look at auto component stock companies which will post good results (hopefully) is by reverse engineering the performance of the vehicle (in India primarily) and map it to their suppliers. For instance, the new Swift is going to make some ripples and suppliers stand to gain from that.

For reference, attaching Rane Holdings' FY17 con-call. The management counts on success of specific models and it reflects in its stock price.

tearningscall1617.pdf

Views invited! :)

PS: In this context, please exclude Hyundai since it procures from its sister company which is unlisted. Maruti, Honda, Ford, Tata, Mahindra, most CV and tractor companies procure locally.