Rousseff Auto Policy Lifts Iochpe Market Value: Corporate Brazil

Rousseff Auto Policy Lifts Iochpe Market Value: Corporate Brazil
In exchange for the tax breaks, automakers pledged to avoid layoffs, Finance Minister Guido Mantega said in May. Photographer: Andrew Harrer/Bloomberg

Iochpe-Maxion SA, the Brazilian supplier of auto parts to Ford Motor Co., is set to extend a two-month rally that has made it the Americas’ most expensive stock in the industry as tax cuts fuel record car sales.

Iochpe has gained 31 percent since this year’s low on July 23 and will probably gain an additional 24 percent in the next 12 months, according to the average of 16 analyst estimates in a Bloomberg survey. It trades at 21 times reported earnings, the highest among peers in the Western Hemisphere with a market value above $1 billion, data compiled by Bloomberg show. Trinidad and Tobago-based Ansa McAl Ltd. ranks second with a ratio of 19.8. TRW Automotive Holdings Corp., the world’s biggest vehicle-safety equipment supplier, is the cheapest at 6.6 times.

Reducing levies on automobiles and spurring car loans are key parts of President Dilma Rousseff’s plan to boost growth in the world’s second-largest emerging market. In May, Brazil cut the so-called IPI tax, helping drive vehicle sales from this year’s low of 249,500 in February to a record-high 420,100 in August, according to the national car dealership association.

“Iochpe has room to keep rising,” Joao Pedro Brugger, who helps oversee 220 million reais ($108.3 million) at Leme Investimentos including Iochpe shares, said by telephone from Florianopolis, Brazil. “The government has signaled that it sees the auto sector as the one that can lead the recovery in manufacturing, which makes companies such as auto-parts makers a good investment opportunity.”

Lending Incentives

In addition to the tax cuts, the government created incentives to encourage auto lending by reducing reserve requirements so banks could increase credit for car purchases. In exchange for the tax breaks, automakers pledged to avoid layoffs, Finance Minister Guido Mantega said in May.

Fiat SpA Chief Executive Officer Sergio Marchionne, facing 700 million euros ($901 million) of losses in Europe, said in a statement Sept. 21 that Brazilian incentives encouraged the Turin, Italy-based carmaker to build a factory in the country. Fiat’s Chrysler Group LLC, Ford and General Motors Co. said U.S. sales in August rose more than analysts estimated as new models sent the market to its fastest sales pace since August 2009, when the U.S. government offered incentives for buyers to exchange older vehicles for new models.

Sao Paulo-based Iochpe’s rally from this year’s low in July gives it a market value of $1.2 billion and compares with a 16 percent rise for the Bovespa Small-Cap index. TRW Automotive gained 23 percent during the same period.

‘Own Legs’

While stimulus can boost the industry for a while, shares may pare gains once the tax breaks announced this year end, said Cristiane Fensterseifer, who helps manage 5.5 billion reais at Geracao Futuro Corretora de Valores SA in Porto Alegre, Brazil.

“It all depends on how the economy is doing when the tax cuts expire,” Fensterseifer said. “There’s always the risk that the stimulus will be withdrawn before the industry is well enough to walk on its own legs.”

Tax cuts on new car purchases that were scheduled to expire in August will remain in place until the end of October, Mantega announced last month.

Iochpe declined to comment on its share valuation and the impact Brazil’s stimulus will have on its business, Luis Fernando de Abreu, manager of investor relations, said by e-mail.

It “makes sense” for Iochpe shares to be trading at a premium relative to its foreign competitors as the growth outlook for the Brazilian auto industry is better than in most countries, Mario Bernardes Junior, an analyst at Banco do Brasil SA, said in a phone interview from Sao Paulo.

‘Temporary Problems’

“The car industry has significant room for growth in Brazil,” Bernardes, who rates the stock the equivalent of buy, said by phone from Sao Paulo. “Even when it faces some temporary problems, it can count on the government to act and smooth things out.”

Iochpe, which also supplies Daimler AG and Toyota Motor Corp. in Brazil, is also benefiting from Brazil’s pledge to increase investments in infrastructure with increased spending on railroads, Brugger said. The company’s AmstedMaxion unit, which makes rail cars, accounted for 8.2 percent of Iochpe’s net revenue in the first half of 2012, according to a statement on the company’s website.

Rousseff said on Aug. 15 that Brazil will sell licenses to build and operate roads and railways, requiring as much as 133 billion reais in investments over 30 years.

“As positive as the outlook for light vehicles can be, it’s a good thing for Iochpe that it has a more diversified business,” Brugger said. “It doesn’t depend only on one specific segment to generate sales.”

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