The Economic Times daily newspaper is available online now.

    CVs, PVs, tractors or 2-wheelers? Surprise auto rally baffles investors

    Synopsis

    Volumes across companies were down around 80 per cent year on year.

    ​AutoShutterstock.com
    As the economy opens up amid a phase-wise relaxation under Unlock 1.0, auto companies have resumed operations at their plants, but production and sales remain tepid.
    New Delhi: Auto stocks that were staring at a dismal future with little investor interest till early April, but they have suddenly come alive on Dalal Street.

    As the economy opens up amid a phase-wise relaxation under Unlock 1.0, auto companies have resumed operations at their plants, but production and sales remain tepid.

    After zero sales in April, May sales were just a fraction of the monthly sales that auto firms used to see in the pre-Covid19 months. Volumes across companies were down around 80 per cent year on year.

    Hope, if any, came from tractor sales numbers, reflecting good demand in rural sector, which also happens to be a key market for the two-wheelers.

    BSE Auto Index is up by 41 per cent in last two months, as investors lapped up the beaten-down stocks to bet on early demand revival.

    Commercial vehicle manufacture Escorts has an been outperformer, jumped 65 per cent in last two months and up 55 per cent for the year to date. Ace investor Rakesh Jhunjhunwala holds 7.42 per cent stake in the company.

    Mahindra & Mahindra and Tata Motors have gained 72 per cent and 51 per cent, respectively. Maruti Suzuki and Ashok Leyland have risen up to 40 per cent. But all these shares are still down around 10 per cent on a year-to-date basis.

    Two-wheeler stocks Hero MotoCorp, Bajaj Auto, TVS Motors and Eicher Motors have surged over 38 per cent in last two months, but are still down up 24 per cent on year-to-date basis.

    "The worst may be behind for auto stocks,” says Sanjiv Bhasin, Director, IIFL Securities. “The auto sector has suffered in last two-three years due to the transition from BS IV to BS VI, high cost of insurance and liquidity crunch due to the NBFC crisis.”

    FY20 was a very difficult and challenging year for the auto industry, as volumes declined sharply across segments. Near-term demand could still remain tepid due to job losses and pay cuts across industries.

    “As the country opens up, people would try to avoid public transport to the extent possible, and use their own vehicles for commuting. That could be a positive for auto stocks," said Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities.

    Industry watchers say social distancing would be the new normal in the post-Covid-19 world. And that is likely to increase demand for personal vehicles. However, unemployment, job cuts and work from home may crimp volume growth.

    Umesh Mehta, Head of Research at Samco Securities, said social distancing being the need of the hour, people will prefer means of personal mobility to shared mobility. “This is definitely a tailwind for the auto sector."

    Will that lead to an overall rise in volumes? Doubtful. “There are other major headwinds such as reduction in purchasing power, unemployment and future income uncertainty, which will pressure volumes,” Mehta said.

    Oza says demand for two-wheelers and lower-end hatchback cars could rise due to social distancing. Lower ticket sizes two-wheelers could be the first preference of consumers in the near future.

    "We expect near-term uncertainty to continue and the recovery for the sector to be slow. Companies with good cash balances, competitive position and rural and farm sector presence should be stock pickers’ choice at the moment", said Mehta.

    Decent harvest and normal monsoons are expected to benefit the farm equipment manufactures and tractors, a segment that has already reported a strong recovery in May with robust volumes.

    Bhasin said a bumper rabi harvest would ensure better-than-expected sales in two-wheelers and tractors. “That way, auto seems to be on the best course over the next few months,” he said.

    Samco’s Mehta said after the recent rally, investors should be selective in picking auto stocks. Hero Motocorp and Escorts remained his top picks, which he said could benefit from faster rural recovery and farm sector push.

    Bhasin is bullish on Hero Motocorp, Eicher Motors, M&M, Escorts, Ashok Leyland and Maruti Suzuki.

    Oza from Kotak Securities picked M&M and Bajaj Auto as his top picks.

    "If the much-awaited scrappage policy materializes, it would make commercial vehicles stocks outperformers in the sector," said Bhasin of IIFL Securities.

    Union Minister Nitin Gadkari recently said the government would soon introduce the vehicle scrappage policy, under which recycling clusters may be established near ports. He said India can emerge as the world-leading automobile manufacturing hub in next five years.



    Read More News on

    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    Read More News on

    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in