Rural demand to aid auto stocks

Auto stocks have remained beaten down since the beginning of the year

Expectation of higher rural income, aided by a good monsoon, is likely to bring cheer to automobile sector stocks. Having been beaten down since the beginning of the year, analysts and fund managers are confident of an improvement in this sector, if interest rates do not fluctuate and rural income continues to strengthen.

“The encouraging monsoon is creating a good grip on the sector, as rural income is on the rise. However, if interest rates start rising more than warranted, then we could see some pain in the sector,” said Kaushik Dani, head of equity at Peerless Mutual Fund.

Since the beginning of the year, the sector performance has been muted as volume growth started to decline on the back of slowing demand. The BSE auto sector index has declined 3.9 per cent since January. However, so far this month, it has risen 8.1 per cent. It rose one per cent on Tuesday, while the benchmark Sensex was up only 0.1 per cent. The rise was led by Ashok Leyland, up about eight per cent. Among the Sensex stocks, Bajaj Auto and Mahindra & Mahindra (M&M) were among the best, up 2.7 per cent and 1.4 per cent, respectively.  The rise was also due to short-covering in this sector, analysts said.

They add, however, that growth in the sector is likely to be uneven, with only the tractor and two-wheeler segments seeing significant improvement in volumes.  

The tractor segment has seen growth with improvement in the western and eastern regions. According to an India Equity Strategy report from Deutsche Bank, the segment’s growth is expected to recover by about 10 per cent year-on-year after a flat 2012-13. The report recommends a ‘hold’ strategy on M&M, the leading tractor manufacturer. The stock is expected to see an upside of 10.3 per cent by the end of this financial year; on Tuesday, it was up to Rs 872.55 a share.

In the passenger vehicle segment, two-wheeler stocks are likely to outperform over the next one year, analysts said. Along with a good monsoon, better export opportunities would drive this segment, since Indian companies have an advantage over Chinese counterparts due to a depreciating currency and lower labour cost. Valuations were also attractive, they said.

“Given that interest rates are unlikely to come down, we believe two-wheelers are likely to outperform four-wheelers,” says a report by financial consultancy Prabhudas Lilladher on the sector, authored by Surjit Arora. Among two-wheeler companies, Bajaj Auto is likely to perform as its market share has been rising and it has a better product portfolio to offer, analysts said. As mentioned earlier, it was up on Tuesday by 2.7 per cent, to Rs 2,032.70 a share, the top performer among Sensex scrips.

However, some analysts believe that the rural consumption story could benefit some of the four-wheeler stocks like Maruti, which sees about 30% of its sales from rural areas. “Rural sales continue to grow at double digits for Maruti while overall sales are down 7-8%. Maruti aims to increase its distribution reach to 100,000 villages this year versus 45,000 last year,” said the Deutsche bank report.