Auto stocks in top gear despite sales de-growth due to Covid-19

The S&P BSE Auto index has beaten the benchmark index for second straight month in May. This is despite the industry heading for another year of double-digit sales decline this fiscal given the lockdown to contain the Covid-19 pandemic.

In May, the S&P BSE Auto index gained 5.6 per cent as compared to 3.8 per cent decline in the S&P BSE Sensex. In April, too, the index had outperformed the frontline benchmark by a wide margin – rallying 24 per cent as against 14.4 per cent rise in the S&P BSE Sensex. The outperformance, however, comes on the back of 42 per cent fall in the index during the January – March 2020 quarter, when the S&P BSE Sensex had declined 29 per cent.

Despite the partial recovery in auto stocks from their recent lows, most analysts remain cautious on the road ahead for the sector and do not see production levels at companies returning to their pre-Covid-19 days in a hurry. CRISIL Research, for instance, sees the overall auto sector sales volume to plunge to multi-year lows in the current fiscal. For the current fiscal, CRISIL estimates sales of passenger vehicles (PVs) to decline 24-26 per cent, compared with a 21-23 per cent contraction for two-wheelers. Commercial vehicle (CV) sales, they believe, are expected to decline 26-28 per cent, while tractor sales are likely to fall only around 7-9 per cent.

“Automobile sales are running out of steam as urban income sentiment wilts under the pandemic. PVs, a big-ticket item with a replacement share of 60-70 per cent, are expected to see purchasing decisions postponed. At the other end, CV sales have been languishing under the impact of new axle-load norms, and are unlikely to show much recovery till freight demand remains low. However, tractors and two-wheelers are likely to see relatively faster recovery in the second half of this fiscal," says Hetal Gandhi, director, CRISIL Research.

Rural focus

That said, within the auto sector, analysts remain bullish on the road ahead for tractors and two-wheelers, where they expect to see relatively faster recovery in the second half of this fiscal. Both the segments, they believe, will benefit from a bumper Rabi production and the forecast of a normal monsoon that augurs well for rural incomes.

“There has been a loss of volumes due to lockdowns in April and May, and most of this loss is expected to be recovered in the coming months. There are several positive factors, including a good Rabi output, opening of procurement centers by the government, expectations of good monsoon, etc. that augur well for demand ahead for tractor industry,” analysts at Emkay Global Financial Services said in sector update note.

Those at HSBC, too, share a similar view. Two-wheeler demand, they believe, is normalising much quicker, exceeding most expectations, since the partial easing in lockdown. With the bulk of the regulatory headwinds (safety norms, BS VI, etc) behind now, the two-wheeler segment should fare better going ahead, they said.

“In our view, most two-wheeler dealers (which are open now) are now seeing throughput in the 50-60 per cent range, compared to normalised levels − much better than PVs. Over the next few quarters, better traction in rural India and the movement towards personal mobility (two-wheelers from trains/metros) should help demand,” wrote Yogesh Aggarwal, Vivek Gedda and Kushan Parikh of HSBC in a May 28 note.

Name	31-03-2020	29-05-2020	% chg
Motherson Sumi	61.05	95.60	56.6
Mahindra & Mahindra	285.00	436.40	53.1
Hero MotoCorp	1594.20	2364.90	48.3
Escorts	662.95	904.00	36.4
Balkrishna Ind	791.10	1078.25	36.3
Bajaj Auto	2024.90	2712.05	33.9
Maruti Suzuki	4287.75	5612.00	30.9

Note: Price on BSE in Rs
Source: ACE Equity