Analysts expect a bumpy ride for auto stocks

Auto-makers have recorded a healthy sales numbers in the first half of calendar year 2018 (CY18) with all the three segments – passenger vehicles (PVs), two-wheelers and commercial vehicles (CVs) witnessing double-digit growth, as compared to the same period last year. 

While sales volume in the PV segment grew 13 per cent year-on-year (y-o-y) in H1CY18, growth in the CV and two-wheeler segment stood at 39 per cent and 20 per cent respectively, data shows.

This pick-up in demand was, however, was not reflected at the bourses with the Nifty Auto index slipping 9.5% during this period, as compared to 8% rise in the Nifty50 index, ACE Equity data shows.

The buoyancy in demand in H1CY18, analysts say, was on account of factors such as the expectation of good monsoon, improved rural sentiment, and investment in infrastructure. The stocks, on the other hand, reflected nervousness on account of a rise in interest rates by the Reserve Bank of India (RBI), implementation of goods and services tax (GST) bill etc. Moreover, trade war fears triggered a rise in commodity prices, including oil. Higher commodity prices would eventually drive up raw material prices for automakers, analysts said. 

“Lower base (because of lack of GST in H12017), is the main reason the sales look so strong, which is not the real picture. Apart from that the rise in raw materials and the huge discounts given by companies to fight competition are affecting the margins, leading to correction in stocks,” says A K Prabhakar, head of research at IDBI Capital.

THE ROAD AHEAD

The road ahead for the sector, according to analysts, could be bumpy. Though the demand could remain buoyant on account of the normal monsoon that in turn boosts rural sentiment, the dent could come in the form of rising interest rates, firm commodity prices, and choppy currency markets. In this backdrop, they expect the stocks to remain range-bound, though there could be specific cases of outperformance and underperformance.

“In coming months, PVs are likely to be the outperformers. CVs, on the other hand, will struggle due to new axle norms while two-wheelers will grow at around 6-8 per cent,” says Ankit Merchant, research analyst at SMC Institutional Equities.

Despite the new axle load norms, the CV segment continues to be buoyant on the back of increasing focus on infrastructure, robust consumption, and improved industrial activity. In July alone, Tata Motors’ CV sales (domestic) grew 25 per cent on y-o-y basis. Meanwhile, for Ashok Leyland, sales of medium and heavy commercial vehicles (M&HCV) surged 22 per cent y-o-y.

Among the lot, Merchant expects a healthy growth in the two-wheeler segment due to normal monsoons in most parts of India, giving a further push to rural demand.  “Fierce competition in entry-level segment motorcycles should lead to overall volume growth. New launches in scooter segment by Honda and other OEMs will boost the segment,” he adds. Bajaj Auto remains his top pick for the segment.

“PV sales are likely to remain subdued on account of high base effect and no major launches, while, unclear axle norms and truckers strike will act as a headwind for CVs which should result into muted growth in coming months,” adds Prabhakar.

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