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This was an interesting bit and important insight that I wanted to share with you about Delhi brother. Recently we found that Delhi brother had sold its holding in Fag Bearings.

We asked him his rationale behind it and this is what he said, “Aziz you know that we are already witnessing depressed growth in this sector and yearly basis a drop of 10% in Fag profits was disappointing. This negative growth has brought down its ROE from 27% to 20%. The first quarter results have also shown weak top line as well as bottom line growth and today’s price reflects very high premium to its intrinsic value. It also looks overstretch as well as I will make more on our employed capital on Fag if I switch to cash!

Fag bearing also manufactures variety of products for the automotive industry. The weakness in their business translates the weak demand from automotive sector for their products to some extent.

Value Operations platform expects negative growth in its profits for current year by almost 23% and consensus reports expects a growth of 8%.  A drop of almost 45% profits in the first quarter results make us to believe that profits for this year end will be close to Value Operations forecast rather than the consensus. Let me remind you here that forecast can change almost every day.

I just had a glance on expected earnings growth rate in the automotive industry to collect more evidence and understand what Delhi Brother was telling to us and they are as follows:

Companies

Value Operations earnings growth forecast for 2014

Consensus earnings growth Forecast for 2014

Bajaj Auto

3%

14%

Hero Motocorp

-6%

4%

TVS Motors

-10%

35%

Maruti Suzuki

23%

35%

Mahindra & Mahindra

19%

-12%

Ashok Leyland

-37%

-13%

Eicher Motors

-14%

-10%

You don’t have to take these forecast seriously but it really helps to do further investigation.  Other than TVS Motors, M&M and Ashok Leyland, the forecast from Value Operations platform and Consensus expectations, there is not more than 10% – 15% variation.

With rupee falling against the dollar will benefit companies who are exporting their products overseas. But a fall of almost double digit in their exports is not helping these companies to take their earnings to higher level.

Yesterday Auto numbers were out and they were very dissappointing too. You can read that by clicking over here

I will keep this topic open for your debate; we are not exposed to any of the above discussed sectors for our Value operations fund.