At a time when the auto companies in India are grappling with a steep drop in sales due to weak consumer demand, with several top automakers and component manufacturers cutting production and laying off employees, their performance at the bourses for the last month presents a totally different picture.
Shares of Maruti Suzuki India (MSIL), country's biggest carmaker, gained an impressive 12 per cent and was the top Nifty performer during this period. Bajaj Auto and Hero MotoCorp followed, rising 11 per cent and 9 per cent, respectively. In comparison, the benchmark Nifty index shed around a per cent while Nifty Auto index gained over 2 per cent during this period, ACE Equity data shows.
The recent up move, analysts say, was on the hopes of a possible cut in GST rates, which in turn fuelled a relief rally in the counters.
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On the operational front, however, their sales data for August continued to be dismal. Sales of Maruti Suzuki, for instance, dropped 32.7 per cent, the worst decline for the company ever. It could sell 106,413 units in August this year, compared to 158,189 units in the same month last year. August marked the tenth straight month when auto sales declined.
Even sales of two-wheelers skid during the month. While the sales of Hero MotoCorp declined over 20 per cent that of TVS Motors and Bajaj Auto slipped 15.4 per cent and 13.4 per cent, respectively. Royal Enfield saw a drop of 23.7 per cent. READ MORE HERE
OUTLOOK REMAINS SUBDUED
The automobile industry has been facing challenges since past three quarters in terms of additional burden of new insurance policy, constraints on loan disbursement from financial institutions and higher axle load norm impacting commercial vehicle (CV) sales, say experts.
"As most auto makers have decided to cut the inventory gradually in 2QFY20, wholesale dispatches were lower than retail during August for most companies, which also impacted year-on-year (YoY) and month-on-month (MoM) performance to some extent,” notes Naveen Kulkarni, Head of Research at Reliance Securities. Kulkarni believes the industry would see sequential improvement in H2FY20, though on YoY basis its performance would remain muted in FY20.
Valuation-wise, the auto sector is trading at a price-to-earnings (P/E) of 17.4x, in line with its historical average, say analysts at Motilal Oswal Financial Services (MOFSL) in their recent report. While there is a clamour to cut the goods and services tax (GST) rate for the auto industry, MOFSL believes the pre-festive demand was not encouraging as inquiries remain tepid, partly impacted by floods in several parts of the country and demand deferment in anticipation of some sops from the government.
INVESTMENT STRATEGY
So, what should you do with the auto stocks then?
Analysts believe investor should not paint the entire sector with the same brush and there are investment-worthy opportunities here, provided one is willing to stay invested for the next 12 – 24 months.
Analysts at Emkay Global have 'buy' rating on Mahindra & Mahindra (M&M), Motherson Sumi, Atul Auto and Exide Industries with the target price of Rs 630, Rs 115, Rs 310 and Rs 247, respectively while they maintain 'hold' on Maruti, Hero Moto Corp and Tata Motors, with the target price of Rs 5,850, Rs 2,380, and Rs 155, respectively. On the other hand, they have 'sell' rating on Ashok Leyland, Bajaj Auto, Eicher Motors, Escorts and TVS Motor.
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Festive season will be the main factor to look at, said Ashwin Patil, a senior research analyst tracking the sector at LKP Securities. Among two wheelers, Patil prefers Hero Motocorp as, according to him, it is a proxy to the economy and rural growth. A good monsoon, he says, can drive sales in rural India (55 per cent of volumes).
“Among the passenger vehicles (PVs), we still like Maruti considering its attractive valuations and it being the best option for the Indian PV revival story, while within the commercial vehicle (CV) space we like Ashok Leyland which is away from any global headwinds and has had a steep correction in its stock price,” Patil wrote in a note dated September 3, 2019.
