Nifty Auto index at over 2-year high on hopes of strong Q3 earnings growth

A healthy festive period, elements of pent-up demand and channel restocking helped the auto industry remain firmly on the recovery path in Q3FY21
Shares of automobile and related companies were in demand in Monday's session with Nifty Auto index hitting an over two-year high, up more than 2 per cent, on expectation of double-digit earnings growth in the October-December quarter (Q3FY21), aided by robust volumes.

At 02:20 pm, Nifty Auto index was up 2.14 per cent at 9,950 as compared to a 0.79-per cent rise in the Nifty50 index. The auto index hit an intra-day high of 9,970, its highest level since September 27, 2018.

Thus far in the month of January 2021, the Nifty Auto index has outperformed the market by surging 8 per cent as compared to a 3.4-per cent rise in the Nifty50 index.

Among individual stocks, Tata Motors rallied 6 per cent to Rs 211 on the National Stock Exchange (NSE). Ashok Leyland, Maruti Suzuki India, TVS Motor Company, Mahindra & Mahindra, Bharat Forge, MRF and Bajaj Auto from the auto index were up 2 per cent to 4 per cent.

GNA Axles, Jtekt India, JK Tyre, TVS Srichakra, Jamna Auto Industries, Steel Strips Wheels and Munjal Auto Industries, among the non-index stocks, gained between 4 per cent and 10 per cent.

A healthy festive period, elements of pent-up demand and channel restocking helped the auto industry remain firmly on the recovery path in Q3FY21. Sales of passenger vehicles (PV), motorcycles and tractors continued to be buoyant, with a pick-up in truck and scooter sales a welcome development.

OEM revenues are expected to rise on the back of consistent volume improvement and better realizations. Ancillaries with high replacement exposure (battery and tyre companies) should also report strong growth. The automobile sector remains a key beneficiary of economic recovery and low-interest rates.

"While topline performance is consequently expected to be strong across our coverage universe, margins are seen contracting sequentially on the back of a sharp rise in key raw materials like metals, rubber & other crude derivatives," ICICI Securities said in auto sector update.

"In ancillaries, companies with high exposure to replacement channel (tyre and battery makers) are thought to have outperformed on the topline front. Companies with global exposure (Bharat Forge, Motherson Sumi) are expected to deliver relatively muted performance. Minda Industries and Balkrishna Industries are seen having done well courtesy a pick-up in demand from base industries (domestic 2-W, 4-W & global agri respectively), accompanied by comparatively healthy margin prints," the brokerage firm said.

Aggregate OPM (ex-Tata Motors) should expand 40 basis points (bps) year-on-year (YoY), despite a surge in commodity prices, owing to better scale, price increases and cost-cutting efforts, analysts at Emkay Global Financial Services said. Cost-control efforts include a reduction in discounts, marketing spends, travelling costs and other variable and fixed expenses.

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