Near-term headwinds may cap upsides for auto stocks, especially 2-wheelers

Price hikes, running costs and supply side pressures are the key concerns

Shares of automobile and ancillary companies entered the fast lane on Monday after automakers, over the weekend, posted December sales figures, which were in line with expectations.

Shares of Tube Investments of India, for instance, surged 7.7 per cent, while those of Eicher Motors, Ashok Leyland, Tata Motors, Bharat Forge, and Maruti Suzuki India gained between 1.4 and 4.6 per cent. Exide Industries, Hero MotoCorp, Bajaj Auto, TVS Motor, and MRF, too, gained up to 1 per cent.

The sector, especially two-wheeler makers, however, may not be entirely out of the woods yet and can have a bumpy road ahead, cautioned analysts, against the backdrop of price hikes and the rising fuel costs, which could limit consumer spending.

According to Harsh Patidar, auto analyst at CapitalVia Global Research, headwinds — such as semiconductor shortage, the surge in Covid-19 cases, and other supply chain disruptions —persist for the sector and they may affect the overall sentiment.  “Passenger vehicle (PV) original equipment manufacturers’ (OEMs’) attempt to catch up to the demand for popular models was impacted by production cuts; entry-level demand trends across two-wheelers and PVs have remained weak. Going ahead, price hikes (8-10 per cent across segments since January 21) and the rising fuel costs could limit consumer wallet spends at the entry level,” said Basudeb Banerjee and Pratit Vjani, research analysts at ICICI Securities.

Hero MotoCorp and Royal Enfield (the two-wheeler unit of Eicher Motors) reported a 13 per cent and 43 per cent monthly increase, respectively; sales of TVS Motor slipped 8 per cent.

Among OEMs, Maruti Suzuki’s despatches rose 10 per cent MoM (down 4 per cent YoY), and Mahindra & Mahindra’s PV volumes fell 9 per cent MoM with the utility vehicle (UV) segment reporting a decline of 10 per cent. Tata Motors, on the contrary, saw a 50 per cent YoY growth. “The two-wheeler performance in December was weak, while PVs are responding well to the strong demand despite the chip shortage issue continuing. Rural markets are still badly impacted, after the second Covid wave, and are taking more time to recover than expected. The rising number of Omicron cases is forcing states to impose curbs, which are impacting demand; they may continue to impact it further,” pointed out Ashwin Patil, senior research analyst at LKP Securities.

On the PV front, he said, most OEMs are facing scarcity of semiconductor chips -- which is the case even in the sports and premium segments of two-wheelers. “Despite this chip crunch, some PVs have managed to post good numbers catering to the encouraging demand.”

Analysts at Motilal Oswal Financial Services expect easing semiconductor supplies to support PV wholesales but the two-wheeler segment may take time to recover.  The brokerage expects the momentum in the commercial vehicle (CV) cycle to continue and prefers companies with higher visibility in terms of demand recovery, strong competitive positioning, margin drivers, and balance sheet strength.