Auto stocks rally; M&M surges 5%, TVS Motor, Bajaj Auto gain 3%

The last four months of 2020 include various auspicious occasions such as Navratri, Dussehra, Diwali, etc, hence, consumer's discretionary purchases rise in such months

Shares of automobiles companies were in focus at the bourses on Wednesday, with the Nifty Auto index, the top gainer among sectoral indices, rising 2 per cent on the National Stock Exchange (NSE) on expectation of higher demand in festival season.

Among individual stocks, Mahindra & Mahindra (M&M) surged as high as 5 per cent, while TVS Motor Company, Bajaj Auto and Tata Motors up 3 per cent each. Ashok Leyland, Hero MotoCorp and Eicher Motors also gained in the range of 1 per cent to 2 per cent on the NSE.

At 12:36 pm, Nifty Auto index was trading 2 per cent higher as compared to 0.33 per cent rise in the Nifty 50 index. The auto index hit an intra-day high of 8,220 -- close to its eight month high level. In the past two months, Nifty Auto index has outpaced the market by surging 15 per cent, against 7.6 per cent gain in the benchmark index.

The last four months of 2020 include various auspicious occasions such as Navratri, Dussehra, Diwali, etc. and additionally marks the wedding season. Hence, consumer’s discretionary purchases rise in such months. The upcoming festive and wedding season brings hope for the automobiles OEMs and hence August 2020 witnessed a rise in production and domestic wholesales (sales from OEMs to dealers). Domestic wholesales for three - tractors, passenger vehicle and 2-wheeler - of five segments of automobiles noted a positive growth.

Analysts at Emkay Global Financial Services estimate that the recent recovery in 2W volumes will manifest into a powerful cyclical rally - with 14 per cent growth in H2FY21E and 25 per cent in FY22E. With 50 per cent rural share, 2Ws could disproportionately benefit from an acceleration in rural economy, lower financing cost, fading impact of sharp price hikes and a noticeable shift away from mass transportation, the brokerage firm said.

According to CARE Ratings, such high growth numbers in domestic wholesales do hint at a potential recovery in consumer demand for automobiles, but retail sales data released by FADA (which refers to sales made by dealers to consumers) for August 2020 depict a differing picture. Retail sales rose marginally by 3.5 per cent month on month (m-o-m) which means that consumer demand is still soft and is not showing much signs of improvement. On the contrary, domestic wholesales by automobile OEMs rose by 21.5 per cent m-o-m in August 2020, the rating agency said in automobile OEMs update.

The demand from rural segment is on a rise for at least entry-level vehicles. Recent data on good monsoon and crop sowing in the current Kharif season suggests a bumper harvest and expectations of a bountiful output in the subsequent Rabi season. These factors though give us optimism for a buoyant agricultural produce this year, however the surplus output needs to be efficiently managed, if not the crop prices could decline in the peak marketing season which shall prove to be counterproductive for the rural economy and thus affect 2-wheeler demand, it said.