Auto stocks surge on improved monsoon expectations

After the gloom from early deficit predictions, sentiment has changed with the advance of rain clouds; however, industry keeps its fingers crossed for July-August progress

Stocks of automobile companies, under a cloud since a deficit monsoon forecast early this month, are on a recovery path. The BSE Auto Index has appreciated more than the benchmark Sensex, after touching its lowest point since November 2014 on June 11.

The gains have been triggered by a more than satisfactory advance of the monsoon that was held to have covered the entire country on Friday, about two weeks ahead of the normal schedule.

Since June 11, the Auto Index, represented by Maruti Suzuki, Tata Motors, Ashok Leyland, Hero MotoCorp and Bajaj Auto, gained 5.2 per cent to close at 18,607 points on Monday. Against this, the Sensex gained 4.8 per cent in the period, to close at 27,645 points.

The rise of the Auto Index was triggered by gains in share prices of most automobile companies. Maruti Suzuki, the country’s largest passenger vehicle maker, gained eight per cent and touched a new high last week.

Tractor maker Escorts has surged 14 per cent since June 11. Two-wheeler maker Bajaj Auto gained 15 per cent. Mahindra & Mahindra, known for its tractors and sports utility vehicles (SUVs), surged over eight per cent. Motherson Sumi, a leading component maker, gained six per cent.

“The incremental news flow on the monsoon has been positive for the industry. This is reflected in the price movement of stocks, especially those with a heavy rural market. No other event has happened this month with a bearing on the industry”, said Jinesh Gandhi, senior vice-president (research) at brokerage firm Motilal Oswal.

The monsoon is a key trigger for the rural economy, as the productivity of the summer or kharif crop in most states is dependent on rain.

A normal monsoon makes or breaks the sentiment for purchase of tractors and two-wheelers, and eventually impacts rural purchase of cars and utility vehicles.

Tractor sales are entirely driven by the rural economy while 40-50 per cent of two-wheeler sales come from rural areas. For car maker Maruti, a third of the sales happen in rural or semi-urban parts.

R S Kalsi, executive director (marketing and sales) at Maruti Suzuki says there is a change in sentiment but it is too early to celebrate; rain trends in July and August will be crucial. “The monsoon affects tractors and two-wheelers more immediately. Cars come at a later stage,” he said.

Tractor sales have been on a decline for several months and manufacturers are hopeful of a recovery in the second half of this financial year. Motorcycle sales declined three per cent in the April-May period. Passenger vehicle sales grew 10 per cent but demand for utility vehicles remained flat.

Saurabh Jain, assistant vice-president (fundamental research) at SMC Global Securities, said the increase in support prices of crops, coupled with prospects of better productivity due to a likely recovery in the monsoon, would drive demand for farm equipment, tractors and two-wheelers.

	11.06.2015 *	26.06.2015	% change
BSE Sensex	26,370.98	27,811.84	5.46
BSE Auto Index	17,688.22	18,865.34	6.65
Maruti Suzuki	3,702.25	4,073.40	10
Bajaj Auto	2,207.55	2,540.15	15
Hero MotoCorp	2,503.65	2,547	1.73
Mahindra&Mahindra	1,188.40	1,299.55	9.35
Escorts	104.15	124.15	19.2

*BSE Auto Index touched its lowest point since November 2014
Source-BSE