Auto sector: Riding out of the slump on a two-wheeler?

Market experts believe that the sector has more upside momentum going ahead

Financial performance of India Inc in the September 2013 quarter has started to trickle in and there is a growing consensus that revenue growth in the recently concluded quarter will be led by information technology (IT), Pharma, financial services and auto sectors; while companies from the capital goods, cement, metals and construction spaces will be a drag.

Since IT and pharma seem too overcrowded at the moment given the uncertain market conditions, select auto stocks present a fairly good opportunity to give good returns on investments going ahead, analysts say, given the road ahead for some of the companies in this space.

In the month of September, the S&P BSE Auto index surged nearly 12%, outperforming key benchmark indices that moved up 7%.

Sales volume

It was yet another quarter of tepid volumes and jaded figures for the auto sector with prospects of a recovery seeming rather bleak. Mired in a sluggish economy, high interest rates and continuous rise in fuel prices, auto sector has gone through enough pain in the last eight months.

As if lackadaisical volumes were not enough to keep top-lines subdued in another quarter of gloom, there is always the bogey of rupee depreciation. Margins will be hit as a depreciated rupee has jacked up commodity costs, say analysts.

However, September sales figures offer a glimmer of hope with some signs of pickup in the month. The two-wheelers and tractors sales figures point towards the light at the end of the tunnel while an impending festive season saw uptick in passenger vehicle segment too.

Indian automakers sold 156,018 cars in India last month, up 0.7% from a year earlier while sales of motorcycles rose 17.4% in September to 885,117, data from the Society of Indian Automobile Manufacturers (SIAM) showed.

Motorcycles sales jumped 30% to 83,043 units in September 2013 over September 2012. Scooters sales rose 8% to 43,201 units in September 2013 over September 2012.

Medium and heavy commercial vehicle (M&HCV) segment was worst hit in Q2 while sales of light commercial vehicles declined too. On the passenger vehicles front, a significant slowdown was witnessed in the passenger Utility Vehicle (UV) segment owing to higher excise duty and increasing higher diesel prices.

The road ahead

A recent unexpected rise in interest rates and hike in car prices has dented the hopes of a recovery in the segment.  But the festive season ahead offers a ray of hope and a pick-up in the rural demand will only be.

Going ahead, analysts at Angel Broking expect the demand environment to remain muted in the near term; however, the upcoming festival season is likely to lead to a marginal recovery in volumes in Q3FY2014. “We maintain our positive stance on Ashok Leyland, Maruti Suzuki, Mahindra & Mahindra and Tata Motors,” says Yaresh Kothari, an analyst with Angel Broking.

Sonam Udasi, head of research at IDBI Capital prefers Tata Motors from a medium-term perspective. He also likes Eicher Motors given continued strong traction in Royal Enfield volumes that has more than compensated for demand weakness in commercial vehicles. “However, we are negative on Maruti Suzuki owing to launch of models targeted at its fast selling models like Swift, D’zire and Ertiga, higher discounting and forex fluctuation,” he says.

“The tractor demand for Mahindra and Mahindra (M&M) remains strong, given the expectations of higher crop output due to a good monsoon. Apart from the strong tractor demand, we believe the automotive volumes would recover with the onset of the festive season. M&M remains our preferred pick in the space,” points out a Sharekhan report on the sector.

IIFL recommends Hero MotoCorp which is positioned to benefit from the recovery in rural demand and is expected to gain from vendor re-alignment.

Adds Ajay Shethiya, an analyst with Centrum Broking: “Valuations and recommendations: We continue to maintain Buy on Tata Motors, Maruti, HeroMotoCorp, MRF and M&M. We are downgrading Bajaj to Hold from Buy, as we believe the stock at these valuations largely factors in positives, and Ashok Leyland to Hold from Buy due to continued pressure on volumes. We maintain Hold rating on Eicher Motors.”