PVs best placed in auto sector; Maruti is favoured pick in the listed space

The auto sector has been the worst performer among sectoral indices over the last year, shedding 34.5 per cent, while the Sensex and the Nifty were down marginally

July was the ninth consecutive month of falling sales, with most automobile companies reporting a slide in domestic volumes upwards of 15 per cent. The lower sales in July were on account of the economic slowdown, higher vehicle prices and inventory correction by automakers. The auto sector has been the worst performer among sectoral indices (see table) over the last year, shedding 34.5 per cent, while the Sensex and the Nifty were down marginally. Despite record low volumes in July and muted June-quarter numbers, auto stocks rebounded over the last two sessions with the BSE Auto gaining over 2.3 per cent.

Analysts say that the worst was probably factored in the valuations. Mitul Shah of Reliance Securities said that while there could be some pressures on volumes over the next few months, valuations may not correct significantly from these levels. Margins, too, have likely bottomed out and may not fall much from these levels. Basudeb Banerjee of Ambit Capital said: “The positive for the sector is that companies have managed to deliver margins which are not below Street expectations and, thus, one can say margins are at the bottom.”

While analysts expect a double-digit decline in volumes for most segments even in August, they believe that there may be some pick up in September ahead of the festival season. Hetal Gandhi, director, CRISIL Research, said: “Considering that Dussera and Diwali are both in October this year (last year they were in October and November, respectively), OEMs should be able to push sales from the second half of August and during September. We, therefore, expect some improvement in demand from the current levels.”

Within the various segments, the passenger vehicle segment is expected to come out of the slowdown ahead of the two-wheeler and the medium and heavy commercial vehicle (M&HCV) segments, said Shah of Reliance Securities. The sector is expected to see an increase in costs due to multiple regulatory changes, including the implementation of the BSVI norms. Analysts believe that changes in safety features, BSVI norms, and insurance costs are expected to lead to a 15 per cent hike in costs of commercial vehicles and two-wheelers, whereas the increase in costs for passenger vehicles, which predominantly run on petrol, will be in single digits. 

An analyst at a domestic brokerage said: “Growth rates for the two-wheeler sector in the medium term would be muted given the higher penetration levels, while that is not the case with passenger vehicles. Further, the medium and heavy commercial vehicle segment is in a cyclical downturn and given the excess supply, funding constraints for fleet operators, weak freight demand and change in axle load norms; the segment will see a double-digit fall in volumes in FY20.”

Within the passenger vehicle space, analysts are betting on Maruti Suzuki, which is the only pure-play passenger vehicle company. Two-thirds of the company’s largely petrol-driven portfolio is already compliant with the BSVI emission norms. It is also expected to price its vehicles competitively and should be able to retain a 50 per cent-plus market share in the passenger vehicle segment. Given that the stock, which is trading at 19 times its FY21 estimates, is not exactly in the attractive category, investors could look at the same on sharp corrections.