Analysis: Outlook for Auto stocks

Most auto stocks have cracked badly in today?s session with Tata Motors slipping nearly 10 per cent.

Most auto stocks witnessed unwinding today with Tata Motors slipping nearly 10 per cent in intra-day trades. The BSE Auto index was among the top sectoral loser, skidding over 3.2 per cent as compared to 0.5 per cent fall in the BSE’s benchmark index, the Sensex.

It was a double whammy for Tata Motors, which was the top loser in this pack. While on one hand, the company said that the sales for JLR (Jaguar Land Rover), which accounts for a majority of Tata Motors' profits, have slowed significantly over the past quarter; research firm UBS cut the company’s fiscal 2013 and 2014 earnings-per-share (EPS) estimates by 6 per cent after this announcement.

UBS maintained its "SELL" rating after the company’s announcement on Wednesday, citing "expensive" valuations, although the investment bank raised its price target to Rs 255 from Rs 250 as it rolls forward the target by six months.

“EBITDA profit is likely to be in the region of levels reported for the previous two quarters and EBITDA margin is likely to be slightly lower than in the previous two quarters, primarily reflecting less favorable exchange rates, the ongoing effect of a higher mix of Evoque sales and other factors," Tata Motors said in a statement.

“Free cash flow (cash from operations after capital spending) will be negative in the quarter ended 31 December (reflecting working capital calendarisation effects); free cash flow will be positive in the first nine months of the Fiscal year to date," it added.

Bharat Forge (down 3.1 per cent), Mahindra and Mahindra (down 2.2 per cent), Ashok Leyland (down 1.6 per cent), Bajaj Auto (down 1.1 per cent) and Hero MotoCorp (down 0.9 per cent) were some of the other losers in this space.

THE ROAD AHEAD

Explains Amar Ambani, head of research, IIFL, “Auto numbers (volumes) have been disappointing across segments – two wheelers, passenger vehicles etc. There has been a de-growth, be it Bajaj Auto, Hero MotoCorp. Even the tractor volumes have been bad. The only saving grace for commercial vehicles (CVs) was the light commercial vehicle (LCV) segment. On top of this, there is intense competition amongst the players in this segment. So, the entire auto industry is struggling.”

“In such a scenario, the industry is faced with union and labour issues, which earlier was haunting Maruti Suzuki and now Hero Moto Corp. I don’t expect the margins to improve in the next two – three quarters given all this,” he adds.

STOCK STRATEGY

So, what should you do with these stocks?

Adds a January 23 note from Aashiesh Agarwaal at Edelweiss Research, “We expect Hero MotoCorp’s (HMC) EBITDA margin in FY14 to continue to remain under pressure given the intense competition in the domestic motorcycle segment. This, along with wage revisions, will continue to impact margin. We value HMC at 12x FY14E core EPS of Rs 96, which along with cash / investments, yields an SOTP of Rs 1,360 per share and maintain Reduce / sector underperformer rating.”

“I think when there is too much pessimism, it is a good time to buy. The stock needs one positive news trigger to bounce back. From that viewpoint, I would BUY Tata Motors on a dip. However, I am not upbeat on the auto pack as a whole. I suggest avoiding the two-wheeler space,” adds Ambani of IIFL.

"Today's correction in Tata Motors was a knee jerk reaction to the news on the JLR side. However, what is important is the new product launch in the next quarter which can be a game changer for the stock. We expect the new launch to push up the sales volumes of JLR thus helping gain market share. So I would suggest that any dip in the stock should be used as a buying opportunity," added Deven Choksey, managing director, K R Choksey Securities.