FY16 will be first of a four-year auto upcycle: Axis Cap

Below is the transcript of the interview on CNBC-TV18.

Sonia: You have a long list of companies that are joining you at the conference. Give us the mood in the auto sector at this point in time. We have seen sluggish trends come in from certain sectors like two-wheelers, etc but what is your own analysis of what is taking place in the sector and what investors should be doing with the stocks?

Nigam: The mood at the conference is very upbeat because there are a lot of tailwinds for the sector – easing rates, soft fuel prices and in general much more solid macro.

At the moment you are entering FY16 which is presumably the first year of at least three to four years automotive up cycle. All ground level monitorables are throwing up very encouraging signs so it is clearly the best time to be meeting these companies and that is the backdrop of our conference.

Like I said investor mood at the conference is very upbeat. All meetings are jam packed. I think it is a tireless hunt to spot the biggest winners. We have around 13 companies participating, a good blend of original equipment manufacturer (OEMs), ancillaries like Sona Koyo, financers, dealers and also sector experts. So, we are trying to provide an all-round perspective to the 150 investors that are attending the conference.

Reema: The mood is clearly upbeat at the investor level but how is the mood on the ground? Are you sensing a perceptible pickup now compared to last year and what would that mean for the growth of the company in FY16?

Chanana: The auto sector has been struggling almost for last two years with de-growth numbers which were clearly in contrast to the growth which the sector achieved in the previous years. The only good is that the growth number which are coming now, which are predicted for the current year of about 4-5 percent that is the only silver lining which shows a change in the trend from negative to positive side.

Industry has been expecting some change in the Budget in terms of excise duty cuts or some kind of a specific sector related incentive or measure to be taken by the government. It has not happened but there are certain positive takeaways from the Budget which are giving a good signal, positive signal to the industries.

To count that maybe few of them is the Rs 70,000 crore allocation for the infrastructure sector including a 1 lakh kilometer of road infrastructure to be built. So, this is a very positive sign, on a macro level it will have a benefit to the industry.

The government willingness to move ahead with the goods and services tax (GST) is a very positive step and the industry is looking forward to it though there is no timelines which have been defined for it.

Thirdly, disposable income, the Rs 8.5 lakh credit which is now being proposed for the farmers’ community will increase agricultural equipments and tractor requirements in the rural economy of India.

These are the few positive takeaways as is being pointed out by the various industry bodies is that the growth for the next year should be better than what the industry is expected to achieve in the current year of about 4-5 percent. So, we are hoping for a better scenario to come up for us.

Sonia: We have seen a good pickup in some of the names like Maruti Suzuki where there are new launches like the Ciaz that have done well. In effect do you think that there could be perhaps a shift out of the two wheeler space and into some of these spaces like passenger vehicles because of the very distinct move that we are seeing in both sectors downside for two wheelers and upside for passenger vehicles and what would your own view be on Maruti itself?Nigam: As far as the two wheeler sector is concerned, what you are saying is right. Demand is slow at the moment especially in rural regions because the unseasonal rainfalls last week have damaged a lot of standing crops. So, rural demand is weak which is hurting two wheelers. On the car side, most dealers we interact with are very optimistic because discounts have tapered sharply. It is expected to taper even further because of all the new launches. Pent up demand is something that everyone is talking about because footfalls have increased very sharply, conversions are yet to pickup; that is a sign of huge pent up demand. Even for commercial vehicles, our preference is for four wheelers over two wheelers. So, Maruti fits into that preference. In commercial vehicles ground level monitorables are throwing up very encouraging signs. You have had freight rates which are very firm despite an 11 percent crack in diesel prices in all of last year.

So, that has improved trucker profitability and as a result the commercial vehicle (CV) cycle should be much sharper than expected. So, our view is clearly a preference of four wheelers over two wheelers and our preferred picks are companies like Ashok Leyland, Tata Motors, Eicher Motors and Motherson Sumi.