Auto shares edge higher; Maruti Suzuki gains 2% on BofAML upgrade

Bank of America Merrill Lynch upgraded Maruti Suzuki India's stock to 'buy' from 'neutral' and raised the target to Rs 8,650 from Rs 7,450 per share

Auto shares were in focus on Tuesday, with the Nifty Auto index climbing 1.5 per cent in intraday trade on the National Stock Exchange (NSE), led by gain in shares of Maruti Suzuki, Tata Motors, and Eicher Motors.

Among individual stocks, Maruti Suzuki India rose 2 per cent to Rs 7,276.50 on reports that Bank of America Merrill Lynch has upgraded the company's stock to 'buy' from 'neutral' and raised the target price to Rs 8,650 from Rs 7,450 per share.

"It feels that the best place for recovery is in the passenger vehicle segment and expect earnings cycle to bottom in FY20. It sees 26 percent EPS CAGR over FY20-22 period, while volume to grow 10 percent each in FY21 and FY22," a report by CNBC-TV18 said.

Tata Motors also gained 1.7 per cent to Rs 177.90 on the NSE after a report by business daily Mint said that the company was in talks with a couple of Chinese automobile companies for a tie-up for its passenger vehicles business. These companies may either invest directly in Tata Motors or form a joint venture, the report said.

Apart from that, Eicher Motors and TVS Motors rose more than a per cent each, Ashok Leyland and Mahindra & Mahindra gained 0.9 per cent and 0.8 per cent, respectively.

The stocks of auto ancillary companies also inched higher. While Bosch Limited climbed 3 per cent, Amara Raja Batteries added 2 per cent. Apollo Tyres, Bharat Forge, and Exide Industries were all up a little over a per cent each.

In the last one month, the Nifty Auto index has underperformed Nifty by slipping 1.5 per cent as compared to a 1.4 per cent gain registered by the benchmark index.

In financial year 2019-20 (April – November), automobile sales witnessed the sharpest decline of 13.2 per cent y-o-y during the last 5 years on back of price hikes in passenger vehicles and two wheeler segments due to new safety norms, higher insurance costs, higher ownership costs, liquidity crisis in the NBFC sector, reduced turnaround time and increased load carrying capacity for CVs led to high inventories and slow movement in segment sales.

Going forward, CARE Ratings expects demand to pick up on month-on-month (m-o-m) basis in December 2019, and continue in Q4 FY20 with various planned product launches, festival demand and pre-buying of automobiles before the implementation of BS-VI norms on April 1, 2020. Also, most of the OEMs in PV segment have announced price hikes from January 2020 to cover the increasing input costs which is expected to boost demand in December 2019 while exerting pressure on sales in Q4 FY20.

The pickup in construction and mining activities along with increased inter-state movement of goods with the streamlining of e-commerce and FMCG and pre-buying of commercial vehicles is expected to provide some cushion for the CV segment. However, faced with an intense slowdown during April – November 2019, the segment is expected to report decline in y-o-y growth for the fiscal FY20. Recovery could take longer if the economic slowdown continues, the rating agency said in a note.