Recent outperformance is unlikely to sustain unless macro conditions change for the better.
The BSE Auto index, which has underperformed broader markets for most of 2011, jumped two per cent on Friday, against a percentage point rise in the BSE Sensex. In fact, since August 5, the index has visibly outperformed the Sensex. So, is the worst behind for the auto sector?
Abhishek Gaoshinde, analyst, Systematix Research, says: “We believe that a large part of correction is over and upsurge in the stock price is on the card. A favourable change in the domestic macro-economic factors (softening of interest rate in H2FY12) and correction in raw material prices (our house view of 3-4 per cent correction in metal prices in H2FY12) should improve the fundamentals of the sector.”
However, some other analysts share a different view. While they believe there may be an uptick in volumes in September and October, as has been the case traditionally during the festive season, they are not sure how the volumes will play out for different categories. While two-wheelers and commercial vehicles (CVs) may do well, there is a question mark on car volumes. Analysts say, unlike last year, the number of enquires for cars, especially in the compact segment which is sensitive to interest rates and fuel prices, has been weak. This is also visible from the 18 per cent decline in the A-segment sales (M800, Alto, A-Star and WagonR) of Maruti in August. Tata Motors has also seen a decline in sales of the Indica, Indigo and Nano in August. Some of the decline for Maruti, though, could be attributed to labour issues at its plant.
Going ahead, profitability is also likely to remain under stress though input prices have come off recently. The compact car segment, for example, will see heightened competition due to new launches coupled with higher discounts and promotions to prop up volumes. On the other hand, two-wheeler volumes in August were up 14-19 per cent year-on-year. Unlike cars and commercial vehicles (CVs), only 30 per cent of two-wheeler sales are on credit. Analysts believe sales will continue to be robust over the next two months, before any moderation creeps in. However, valuations of two-wheeler companies are peaking, with limited upside from here on.
The surprise element in August sales was the CV segment, which despite rising interest rates, continued to do well (Tata Motors CV sales were up 21-27 per cent). Analysts say, while demand for intra-city transport as well as the high-end (above 18 tonnes) CVs remains healthy, some moderation in overall volumes may happen post the festive season. In this backdrop, analysts believe investors should be selective. Analysts like M&M due to consistent rise in volumes and higher rural sales. While they believe Tata Motors’ stock will remain under pressure due to concern over Europe and US sales, for Maruti the upside is limited. Among two-wheelers, Bajaj Auto is a better bet, as analysts believe Hero will see pressure on margins due to higher brand promotion in the near term.
