Auto stocks see sharp recovery, index gains over 70% after falling in March

Domestic institutional investors have raised their weights to the sector

Auto stocks, which had come under heavy selling pressure during the Covid-19-induced lockdown, have seen sharp recovery with the auto index gaining over 70 per cent since March lows. In comparison, the frontline market index Nifty has recovered 49 per cent since the March 23 lows.

Auto ancillary stocks and commercial vehicle (CV) players have been among the top gainers. Motherson Sumi (120 per cent), Mahindra & Mahindra (107.7 per cent), Balkrishna Industries (95.3 per cent), Ashok Leyland (92.6 per cent), and Amar Raja Batteries (90.2 per cent), have been among the highest gainers in the BSE auto index.

Experts say the sector is seeing green-shoots, as against the Street’s bleak outlook. “We are seeing several encouraging signs. Demand has sustained in July and August, which can be seen from secondary sales,” said Kunj Bansal, partner and chief investment officer at Sarthi group.

Analysts have started to upgrade volume estimates for financial year 2020-21 (FY21) and FY22, following the June quarter (Q1) numbers. “The demand recovery surprised original equipment manufacturers (OEMs) and dealers,” analysts at Motilal Oswal Financial Services said in a note. 

Domestic institutional investors (DIIs) have been increasing their allocations to the sector. In Q1, DIIs raised their weighting towards auto sector by 100 basis points (bps) on a sequential basis. 

Auto was the sector to see the second-largest jump in weight by DIIs, showed a report by Motilal Oswal Financial Services.

In the two-wheelers and passenger car segment, Hero Motocorp (87.8 per cent), Tata Motors (73.5 per cent), Maruti Suzuki (65.6 per cent), Bajaj Auto (57.6 per cent), Eicher Motors (57.4 per cent), have been the top gainers since March 23.

“The auto sector had got de-rated as the expectations were that the pre-Covid slowdown in sales would remain aggravated in light of the pandemic. However, we are seeing green shoots, which is driving the positive sentiments,” Bansal said.

Bansal pointed out that management commentaries of auto ancillary players suggest that their order books are full for both August and September. 

“This means that auto OEMs are seeing that kind of demand visibility, which is why they are placing orders with the ancillary players,” he said.

The auto sector was among the worst-hit as the Covid-19 outbreak spread and the country imposed a lockdown.

The BSE auto index was down 42 per cent till March 23, in year-to-date terms.

“In the pre-Covid environment, there was clearly a contraction in the sector. After the pandemic, there was immediate slowdown, with players seeing zero sales in April. However, this was followed by some recovery in May and June, which was largely due to pent up demand,” Bansal said.