Auto shares trade weak on concerns of production cut due to slower demand

TVS Motor Company, Eicher Motors and Hero MotoCorp were dipped in the range of 2 to 3 per cent, while Ashok Leyland, Bajaj Auto and Maruti Suzuki India down 1 per cent each on the NSE

Shares of automobiles companies were trading weak for the second straight day on concerns of production cut due to slower demand.

TVS Motor Company, Eicher Motors and Hero MotoCorp dipped in the range of 2 to 3 per cent, while Ashok Leyland, Bajaj Auto and Maruti Suzuki India were down 1 per cent each on the National Stock Exchange (NSE).

At 11:31 am, Nifty Auto index was down 1 per cent at 8,552 points, as compared to 0.05 per cent rise in the benchmark Nifty 50 index.

The stock of Maruti Suzuki India (MSIL) has fallen nearly 4 per cent in the past two trading days over a report that the company cut production by a quarter over March last year. Maruti is estimated to have cut production to around 126,000 units as compared to more than 172,000 units a year ago, which is a 26.8 per cent reduction, the Business Standard reported.

Analysts at JP Morgan believe that the calendar year 2019 (CY19) is a challenging year for the automobile sector given slow demand trends, need for channel inventory correction, and most importantly, significant regulatory-led cost push. Earnings in this backdrop are vulnerable and are likely to see cuts ahead across companies, it said.

The February retails released by the dealer association (Source: FADA) reflects sustained weak volume trends across segments in February (total vehicle retails down 8 per cent Y/Y vs wholesales down 4 per cent Y/Y in Feb) and meaningful increase in inventory levels. Commentary although is more concerning, pointing to stress at dealerships due to muted demand sentiment, high inventory and tight financing, the brokerage firm said in a report dated March 14, 2019.

The market checks suggest sustained high discounting and attractive financing schemes to revive demand. In the release, dealers have urged the OEMs to take the corrective action (production cuts, curbing wholesales) as channel inventory is at unsustainable levels especially in 2Ws (at 3 months), it said.

The domestic Commercial Vehicle (CV) industry is witnessing cycles within a cycle, led by regulatory changes (axle load norms), financing issues and the upcoming Lok Sabha election. Brokerage firm Motilal Oswal Securities estimate CV industry volumes to remain muted for another quarter or so, and then recover from 2QFY20. However, 1HFY21 will again witness a downcycle post BS6 implementation (longer downcycle for LCVs).