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Auto upcycle: Sustained turnaround can drive stock prices up multi-folds

Interest rates should either remain stable, or come down until January 2016 at least; fuels are slated to remain cheap, with crude and CNG down

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Devangshu Datta
In mid-July, the Society of Indian Automobile Manufacturers (SIAM) projected that financial year (2015-16) would show a pickup in commercial vehicles (CV) sales, single-digit growth in car sales, and flat sales in the two-wheeler segment.

The CV segment saw contractions year-on-year in 2013-14, and it has seen growth every month since May 2014.  In the two-wheeler segment, low rural demand is the prime cause for fearing flat sales. Car demand is apparently looking up, with stimulus from low fuel prices, and new model launches. There has also been a sharp rise in employee compensation in calendar 2015, and this could have been a demand stimulus.

The Q1, 2014-15 results seem to be in line with projections. Passenger vehicle sales rose by 6.17 per cent for April-June 2015, compared to April-June 2014. Car sales grew at 8.6 per cent, while vans grew at 1.5 per cent. However, utility vehicles sales, which are sensitive to rural conditions, fell by 0.6 per cent.

The commercial vehicle (heavy, medium, light) segment was up 3.5 per cent for the Q1, 2015-16. The medium and heavy CVs grew by 23 per cent in Q1 but light vehicles is down by 7.4 per cent. Two-wheeler sales were flat, up just 0.6 per cent in Q1 2015, with a decline in motorcycle sales (minus two per cent). Scooters grew 7.25 per cent and mopeds grew by four per cent. Three-wheeler sales declined. Unit automobile exports also grew for Q1, FY2016 despite tough conditions.

Among motor cycle majors, Hero Motors saw sales contraction in April-June 2015, with 1,645,867 units sold versus 1,715,254 units sold in April-June 2014. Bajaj Auto saw sales rising two per cent overall (domestic and exports with two wheelers and three wheelers). Bajaj's motorcycle sales fell to 485,818 units from 490,481 units in Q1, 2014-15. TVS Motors did better than Bajaj and Hero, with total sales (domestic and exports with two wheelers and three wheelers) up nine per cent in Q1.  

In July, two-wheeler sales continue to look muted. In total, sales have grown 0.6 per cent for eight manufacturers, with 1,462,740 units sold versus 1,454,013 units sold in July 2014. The CV segment continues to look in better shape with 5 per cent sales growth in July. There was a big 17 per cent jump in passenger vehicle sales, with a rise of 17.2 per cent in July 2015, over July 2014.  

Are there signs of reviving demand in these numbers? Assuming the trend holds, the rise in sales in the car segment suggests middle class consumption is recovering. The CV segment is a pointer to some return of business confidence. Two wheeler sales could also perk up if the monsoons are better since rural demand varies with the monsoon.

Interest rates should either remain stable, or come down until January 2016 at least. Fuels are slated to remain cheap, with crude and CNG down. Metal prices are at multi-year lows, which should enable manufacturers to reduce expenses. The auto ancillary sector should also benefit as offtake rises.

Currency moves are hard to judge. A weaker rupee could drive exports but it may also force up costs of imported components. Maruti has benefited from a weak Yen since this has reduced expenses in rupee terms. Tata Motors has suffered due to low Chinese demand for JLR.

Many big players are unlisted. Also, revival has been eagerly anticipated for a while and share prices have been pushed up for the listed firms. Nevertheless, the sector is definitely worth watching. It has a long cycle and turnarounds can drive prices up by multiples over a period of several years.
The author is a technical and equity analyst
 

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First Published: Aug 11 2015 | 10:38 PM IST

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