Auto shares skid; Eicher Motors hits lowest level since November 2014

Eicher Motors, Bharat Forge, M&M, Maruti Suzuki and Hero MotoCorp slipped more than 5 per cent on the NSE today

Shares of automobiles companies were trading lower for the second straight day on the National Stock Exchange (NSE) on Monday as the spread of the Covid-19 virus is fading the volume outlook. Covid-19, analysts say, will have an immediate short-term adverse impact on the automobile industry due to a decline in incomes and a slowdown in commercial activity. 

Eicher Motors, Bharat Forge, Mahindra & Mahindra (M&M), Maruti Suzuki India and Hero MotoCorp slipped more than 5 per cent, while MRF, TVS Motor Company, Apollo Tyres, Bajaj Auto, Bosch, Motherson Sumi Systems, Ashok Leyland and Tata Motors were down in the range of 3 to 5 per cent on the NSE.

At 01:27 pm, Nifty Auto index was down 5.5 per cent, as compared to a 3.3 per cent decline in the Nifty50 index. In the past two trading days, the auto index plunged 7.7 per cent compared to a 3 per cent fall in the benchmark index.

Among the individual stocks, Eicher Motors tanked 8.5 per cent to Rs 13,100, its lowest level since November 2014. TVS Motor Company, on the other hand, hit 52-week low of Rs 288, down 5 per cent today, having fallen 11 per cent in the past two trading days.

The Supreme court on March 27, 2020 provided an extension of 10 days post the end of the lockdown period, given the unusual conditions prevailing in the country.

"While the industry players were looking for a 3 month extension, i.e., till June 30, 2020, the 10 day extension post the lockdown by the Supreme court is not expected to do any good to the industry given the current situation with the COVID-19 pandemic," CARE Ratings said in auto sector update.

The buying sentiment post the lockdown period is lifted is likely to be low and consumer will be cautious in spending particularly on luxury/big-ticket items thereby not meeting the desired objective to clear the BS IV inventory with the dealers, it added.

Meanwhile, auto industry was expected to recover from the second half of the financial year 2020-21 (2HFY21) after clearing the last hurdle of BS-VI (Bharat Stage) transition. However, the breakout of coronavirus in India has come as an additional challenge for the already battered auto industry.

“As a result, we have seen a sharp correction in the auto/auto component stock prices. Valuations appear attractive, but given the uncertain macro environment and the threat of possible prolonged impact of coronavirus, we prefer stocks offering higher visibility of demand recovery, better competitive positioning, scope of higher operating leverage and strong balance sheet,” Motilal Oswal Securities said in sector update.

Analysts at JP Morgan, meanwhile, have cut FY21E EPS by 15-20 per cent & F22 by around 10 per cent to factor in the Covid-19 impact, though the brokerage firm said it recognized that earnings estimates are still extremely unclear and fluid.

“As for valuations, stocks of most original equipment manufacturers or OEMs are trading at the lower end of their historic range, suggesting limited downside risk. Valuations of select two-wheeler, such as Bajaj Auto and Hero MotoCorp, and commercial vehicle stocks, are approaching levels experienced that were witnessed during the global financial crises (GFC),” said analysts at Dolat Capital.

The brokerage firm believes due to supply issue from China for BS-VI products and lockdown in India due to fear of the virus spreading, the government may extend the BS-IV transition deadline from the current March 2020, which could be solace for Hero MotoCorp, Bajaj Auto, TVs Motors, M&M and Ashok Leyland.

On Friday, the Supreme Court relaxed the 31 March deadline for winding up sales and registrations of BS-IV emission norm-compliant vehicles amid the 21-day nationwide lockdown. The apex court allowed sale of 10 per cent of the unsold stock of BS-IV vehicles within 10 days of the end of the lockdown, except in Delhi and the National Capital Region.