How Would The Auto Stocks Perform After The Steep Fall In August Sales?

Vehicle sales across categories registered a decline of 23.55 per cent year-on-year (YoY) in August 2019, falling for the tenth consecutive month. The following table shows the August sales figures for major auto manufacturers in India, it is clear that the decline is fairly broad based and the magnitude of decline is very high across players. The numbers also show a simultaneous decline in the exports which indicates weak consumer demand overseas too. 

Slowdown in the Indian economy, weak consumer sentiment, tight liquidity and non-availability of finance has weighed in heavily on the auto industry in India. Other important reasons that have contributed to the weakness include, new safety norms starting April 1, 2020, higher insurance costs, higher ownership costs, increased load carrying capacity for M&HCVs leading to high inventories at retail (dealers) level causing slow movement in wholesale movement of vehicles.

The stress in the sector is reflected in the performance of the listed stocks in the auto sector. The BSE AUTO index has been the worst performing sectoral index, down 34 percent from its yearly high against 8 percent fall in SENSEX. 

To alleviate the distressed auto sector both the Government and the Central Bank have started working expediently. The government action is twin focused; one to boost consumer sentiments through incentives such as lowering the existing GST rates, reducing the cost of ownership for the consumer, the second set of government action is in terms of providing sufficient liquidity to the auto sector. The country’s Central Bank has lent a helping hand with the latest round of interest rate reductions and provisioning for more funds to the NBFC sector, which is the primary lender to the auto consumer. The government has already announced several measures in the last fortnight, clarification on norms for BS-VI transition, reduced depreciation on old cars and other measures in the offing bode well for the sector for the upcoming festive season. Also lifting of ban of the purchase of new vehicles by the government, a scrappage policy is currently in the works which will mandate scrapping of vehicles of certain age that could boost automobile demand are positives for the sector.  The proposed increase in registration fee of cars have also been deferred till June 2020. Additionally there is a possibility that the GST rates on non-electric and hybrid automobiles may be reduced further.

Way ahead for Auto Stocks- Post Government’s announcement in support of the auto sector, a rally of around 5-10 percent has been seen in auto stocks. Since the stocks were beaten down to such an extent that some relief uptick was always on the cards, however for the stocks to show a meaningful trend reversal the current trend of declining sales has to stem, the September and October sales number would be telling and a clearer picture. It can be said without a doubt that the sector has gone through a P/E re-rating and the premiums that the market leaders once commanded would no longer be available.

Investors should not buy individual stocks just because they have fallen significantly, for e.g. although Maruti has corrected sharply it’s still trading around its 5 yr average PE, whereas M&M is trading well below its average PE, so from a pure valuation perspective M&M is cheaper to own.

Select stocks in the segment with robust and diverse product pipelines with a focus on electric vehicles are expected to out-perform their peers in the next three to five years. We believe that the turn-around in the sector is still a few quarters away, until then auto sector stocks would be volatile, our expectation is that the two wheeler stocks would be the front-runner stocks in the turn-around phase, therefore investors can look into buying good quality stocks in this space in a stepped manner.

The author is Director Wealth Discovery at EZ Wealth