Auto stocks extend gains; Nifty Auto index surges 20% in three days

Shares of automobile companies were trading higher for the third straight day on Thursday with the Nifty Auto index rallying 20 per cent in the past three days on value buying.

Mahindra & Mahindra (M&M), Maruti Suzuki India, Bajaj Auto, Hero MotoCorp, Tata Motors and Motherson Sumi Systems from the Nifty Auto index were up in the range of 8 per cent to 11 per cent on the National Stock Exchange (NSE).

At 12:17 pm, Nifty Auto index, the top gainer among sectoral indices, was up 7.8 per cent, as compared to a 3.4 per cent rise in the Nifty 50 index. In the past three days, the auto index surged 20 per cent as against a 12 per cent gain in the benchmark index.

Prior to April 3, in one month, the Nifty Auto index slipped 35 per cent, as compared to a 28 per cent decline in the Nifty 50 index.

According to Moody's Investors Service, the most global automakers are contending with the coronavirus (Covid)-related drop in demand with a more significant liquidity buffer than a decade ago.

Liquidity is particularly strong among most European and Asian auto manufacturers, which provides a degree of confidence in their ability to manage through the next few quarters of high cash burn.

"Also, the sizable government aid packages announced in late March will be beneficial for the sector, especially large enterprises like auto manufacturers and provide liquidity support to their captive subsidiaries in case of need," said Falk Frey, Moody's Senior Vice President said in a press release on April 7.

Meanwhile, analysts at Dolat Capital, lowered EPS estimates further in the range of 10-20 per cent for FY21/22E for its automobile universe, given the scenario of extension of the lockdown in a few cities and a slower-than-expected recovery.

Analysts believe April-June quarter (Q1FY21) is likely to be completely wash-out for automobile companies, and volume should drop in the range of 30-40 per cent year-on-year (YoY). They expect signs of improvement in sales to be visible from the second half of the current fiscal, based on the assumption that the current lockdown is extended by another two weeks.

However, the brokerage firm have buy rating on Eicher Motors (given attractive valuation and strong BS), Hero MotoCorp , and Maruti as they seem relatively better placed owing to its product portfolio (recovery in entry level segment will be faster than premium segment) and geographical diversification (strong distribution network in rural markets).

Eicher Motors, TVS Motor, and Bajaj Auto to face higher pressure on volume, due to their sizeable presence in states which are more severely affected by Covid and higher export contribution, it added.

Among individual stocks, M&M was up 8 per cent to Rs 353, thus gaining 26 per cent in three days, after the company’s board turned down a proposal to pump in fresh equity of $406 million in its ailing South Korean subsidiary SsangYong Motor Co (SYMC) amid the ongoing Covid-19 crisis.