Auto index outperforms benchmark Sensex for second straight month

The S&P BSE Auto index is set to beat the benchmark index for second straight month despite the industry heading for another year of double-digit sales decline this fiscal, given the extended lockdown to contain the Covid-19 pandemic.

Thus far in the month of May, the S&P BSE Auto index has gained 5 per cent, as compared to 5 per cent decline in the S&P BSE Sensex. In the previous month of April, the auto index soared 24 per cent against 14.4 per cent rise recorded by the benchmark index. In the first three months (January-March), the auto index had tanked 42 per cent, as compared to 29 per cent decline in the Sensex.

After almost zero sales in April due to the complete lockdown, the Indian Auto industry has restarted operations (both plants and dealerships) partially, even as it adheres to new operating norms.

According to CRISIL Research, overall auto sector sales volume would plunge to multi-year lows, with sales of passenger vehicles1 (PVs) and commercial vehicles (CVs) reaching fiscal 2010 levels.

“Automobile sales are running out of steam as urban income sentiment wilts under the pandemic. We assessed around 26,000 companies that have a total employee cost of Rs 7 trillion. It indicates that over 60 per cent of this cost resides in companies that are expected to see a sharp reduction in revenue growth, and where employees are a meaningful cost head. This is expected to lead to higher risk of job losses or pay cuts,”Hetal Gandhi, Director, CRISIL Research said in a press release.

However, Mahindra & Mahindra (M&M) has rallied 55 per cent in the past two months, and Hero MotoCorp has soared 46 per cent. They are followed by Escorts (up 37 per cent) and Bajaj Auto (up 32 per cent). These stocks have outpaced the auto index during this period. Maruti Suzuki India and Eicher Motors were up 28 per cent and 29 per cent, respectively.

Among the auto sector, tractors and two-wheelers are likely to see relatively faster recovery in the second half of this fiscal. Both the segments benefit from a bumper Rabi production and the forecast of a normal monsoon, which augur well for rural incomes. Within two-wheelers, which have a lower replacement share of 50 per cent and lower finance penetration of 35-40 per cent, motorcycles are expected to fare better, riding on rural demand.

“There has been a loss of volumes due to lockdowns in April and May, and most of this loss is expected to be recovered in the coming months. There are several positive factors, including a good Rabi output, opening of procurement centers by the government, expectations of good monsoon, etc. that augur well for demand ahead for tractor industry,” analysts at Emkay Global Financial Services said in sector update.

“The near-term demand outlook of automobiles sector is weak as we see gradual restoration of normalcy post lifting of the lockdown. We hope for gradual recovery from 2HFY21, which should be led by the festive season. With multiple moving parts in the form of  normalization of supply side,  consumer sentiment,  availability of finance, and impact of BS6 cost inflation, demand normalization in 2HFY21 is the biggest monitorable,” Motilal Oswal Securities said in automobile sector report.

"Valuations appear attractive across companies, but given the uncertain macro environment and threat of the possible prolonged impact of Coronavirus, we prefer stocks offering higher visibility of demand recovery, better competitive positioning, scope of higher operating leverage and strong balance sheet," the brokerage firm said.