Auto stocks may find it difficult to sustain rally

The rally in auto stocks may hit a speed bump after the recent rally in the last one month in anticipation of strong festival season sales. Analysts say they will watch out for the November and December volumes to discern the sustainability of demand.

The BSE Auto index has gained 13 per cent in the last one month. However, the rally is losing steam, with the index ending in the red in four out of the last five sessions. The BSE Auto index ended down 0.35 per cent at 18495 on Tuesday.

“Auto stocks have run up substantially in the past one or two months in anticipation of improvement on a month-on-month basis in the whoelsale as well as retail volumes which in a way has materialised but the volumes are lower on a YoY basis. The next 6-12 months will be challenging as companies need to prepare for BS-6 norms,” said Jigar Shah, CEO, Maybank Kim Eng Securities India.

Analysts said auto makers will have to sell all BS-4 inventories by the end of FY20 and in FY21, as they launch BS-6, the prices of vehicles will go up which will lead to some slowdown in diesel vehicles, and to some extent in petrol vehicles. One cannot say that demand situation will become normal as it used to be the case in the last four-five years, they said. Companies have got volumes in October because of festival season and heavy promotion or discounting, said analysts.

“Most of the auto stocks are trading above average valuations which is not justified as no major recovery is expected in the next few quarters,” said Shah.

Ashok Leyland is trading at 12.3 times on a trailing basis, higher than last five years’ average PE of 10.3 times. M&M, Motherson Sumi Systems, Apollo Tyres, TVS Motor, Balkrishna Industries, Maruti Suzuki India and MRF are trading above their last 5-year average PEs. All auto index constituents are sharply off their all-time highs. M&M, Ashok Leyland, Eicher Motors, Maruti Suzuki India, Tata Motors and Hero Moto-Corp are down 7-39 per cent from their lifetime high levels.

Auto stocks may find it difficult to sustain rally

The market has been anticipating a revival in demand which is reflected in the upmove in stocks, but for it to reflect in actual sales may take some time, said Rajeev Thakkar, CIO at PPFAS Mutual Fund.

According to Citi, October auto volumes saw a common trend of weak wholesale sales and high retail sales, though the extent of disparity varied. This was due to a seasonal uptick in festival season demand as well as inventory clearing.

The auto space has been out of favour with investors for better part of the year due to liquidity crisis in the shadow banking industry and tough regulatory framework.

“Stocks have gone up on expectation of better sales during the Diwali period. October sales were better on a month-on-month basis but the only positive news for passenger car and two-wheeler companies is inventory levels have come down to 18-20 days from 40-45 days earlier,” said Avinash Gorakshakar, head of research at Joindre Capital.

“We are not going to see any major improvement in December or the March quarter. It will take some time for sentiment to improve,” said Gorakshakar.

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