Chip shortage, rising input costs: Auto stocks may remain underperformers

Auto stocks are likely to continue with their underperformance going ahead, as most companies from the sector grapple with multiple headwinds that include semiconductor shortage, rising input costs and competition from the electric vehicle (EV) segment.

“The auto sector is facing multiple headwinds such as high raw material prices, chip shortages etc. The traditional four-and two-wheeler segment also faces competition from the electric vehicle (EV) segment. Though valuations are attractive, auto stocks will continue to remain under pressure. It is a long road to recovery for them,” said A K Prabhakar, head of research at IDBI Capital.

At the ground level, chip shortages, according to analysts at Jefferies, have already started to hurt Indian auto production where companies such as Maruti, Bajaj Auto and Royal Enfield have seen an increased impact in the September quarter. Maruti Suzuki, for instance, expects its total vehicle production in September across its plants in Haryana and Gujarat to drop 60 per cent due to chip shortage.

Meanwhile, raw material costs have been another sore point for the Indian automakers. Indian steel prices, according to reports, are at an all-time high of Rs 67,500/tonne, which is 5 per cent above their June quarter average. Spot aluminum price at $2,674/tonne is also 12 per cent higher than the June quarter average.

To counter the rise in input costs, Maruti plans to hike prices across-the-board from September, making it the fourth such increase this year. While the hike was minimal in the last three rounds, analysts expect the one in September to be steeper, given the rise in prices of raw materials such as steel and copper.

“Asian steel prices are holding up despite the sharp fall in iron ore. Slowing credit growth has raised concerns on Chinese metal demand although a seasonal pick-up in construction and infra stimulus should provide tailwind; potential production cuts could also tighten supply in the second half of calendar year 2021 (H2-CY21),” wrote Nitij Mangal and Sagar Sahu of Jefferies in a recent report.

Besides the four-wheeler segment, demand for two-wheelers, according to analysts at JM Financial, is being impacted by commodity-related price hikes, increase in fuel prices, impact on disposable income from the second Covid wave and a cautious stance of consumers given the possibility of a third wave of Covid infections.

Demand recovery

“Enquiry levels are also lower than normal. Footfalls are low as a high share of enquiries are shifting online. There have been instances where the customers are delaying purchase in anticipation of launch of EV products from the existing OEMs/Ola Electric,” wrote Vivek Kumar and Nitinn Aggarwala of JM Financial in a recent report.

At the bourses, the Nifty Auto index has underperformed thus far in fiscal 2021-22 (FY22) by rallying 1.7 per cent as compared to around 17 per cent rise in the Nifty50 index, ACE Equity data show. Mahindra & Mahindra (M&M), Tata Motors, Maruti Suzuki in the four-wheeler pack and TVS Motor, Hero MotoCorp in the two-wheeler segment have given sub-par returns. (See table below)

“The pent-up demand for automobiles will fade away soon as people take to public transport after being vaccinated against the Covid infection. That apart, chip shortage, rising fuel costs for consumers and firm input costs for auto manufacturers will keep the demand in check. As a result, most auto stocks will underperform in the second half of FY22,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.

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