Auto index hits nearly eight-month high ahead of June quarter earnings

June Sales Performance

In the recently ended month, passenger vehicle and commercial vehicle segments reported strong performance on a year-on-year as well as a sequential basis, though there was a decline in tractors sales on a high base of last year.

"Commercial vehicle (CV) sector continued to shine as its underlying drivers are very much in place. Passenger vehicles (PV) have a strong order book but supply concern still prevails," LKP Securities said.

Interestingly, the chip shortage is resolving at a good pace now and is expected to get resolved by the festive season. New launches coupled with existing demand are expected to act positively on the PV sector, the brokerage added.

On the two-wheeler segment, LKP said the marriage season in rural parts of North India yielded some positivity in 2-wheeler sales. "Sentimentally, too, we see 2-wheeler demand moving up. The low base of last year is also helping."

The brokerage remains positive on the entire automobile sector and its top picks are Bajaj Auto, Hero MotoCorp, Maruti Suzuki India, Mahindra & Mahindra, Ashok Leyland, and Tata Motors.

Every dip in these stocks in the short term (driven by higher input costs, supply chain issues etc), shall provide good opportunities for investors to enter into them from a medium to long-term perspective, LKP advised.

The automobile retail registration data reported by FADA indicates total vehicle retail for June 22 increased by 27 percent YoY with growth across categories i.e. 2-wheeler, 3-wheeler, PV, tractors and CV. However, compared with the pre-COVID level of June 2019, total vehicle retail was down by 9 percent with a sharper decline in 2-wheeler and 3-wheeler.

"Though few categories are consistently showing recovery, full recovery is yet to be witnessed when compared to pre-covid times. Increased wholesale reflects ease in semi-conductor availability thus reducing supply side constraints going ahead," said Mitul Shah, Head of Research at Reliance Securities.

He expects a strong bounce back in 2HFY23 with rural recovery post favourable monsoon and further ease on semiconductor availability. He further expects YoY volume growth across categories in FY23E with M&HCVs and 3Ws expected to record more than 30 percent growth.

All eyes on earnings season

The auto companies' earnings are expected to be robust on a year-on-year basis as the base was impacted by the second COVID wave, while the sequential performance may be moderately lower due to chip shortage issue in the PV segment, and seasonality-led decline in CV, which is on expected lines, but given the easing raw material prices, the margin may bottom out in June quarter, experts said.

"Near normal economic activity, healthy retail sales (Q1FY23 averaging at around 92 percent of pre-Covid levels), robust demand in PV segment amid new launches in the SUV domain, cut in excise duty on fuels (Rs 8 per litre on petrol, Rs 6 per litre on diesel) in May 2022 and plummeting key raw material prices (mainly metals) towards the fag end of the quarter post their peak in April-May 2022 were the key highlights for Q1FY23," ICICI Direct said.

The brokerage expects total industry volumes in Q1FY23 to jump up around 10 percent QoQ led by the robust performance of the industry leader in the 2-wheeler space with the rest of the categories (PV, 3-wheeler, CV) witnessing de-growth QoQ.

Kotak Institutional Equities forecasts revenues for the auto stocks under its coverage to decline by 1 percent QoQ in Q1FY23 led by chip shortage impacting PV production volumes and a decline in CV segment volumes due to seasonality, which will be offset by a recovery in the 2-wheeler segment volumes and higher average selling prices.

The research house expects EBITDA (earnings before interest, tax, depreciation and amortisation) to decline by 6 percent QoQ due to raw material headwinds.

After excluding Tata Motors, ICICI Direct expects the segment to report 1.5 percent QoQ topline growth & around 10 bps QoQ margin improvement with PAT expected to decline 9.7 percent QoQ primarily tracking exceptional gains in Q4FY22 (Ashok Leyland, Bajaj Auto).

However, on a YoY basis, operational performance is likely to be robust at high double-digit growth due to COVID impacted lower sales in the base year, the brokerage said.

Technical View

Technically, the Nifty Auto index has seen a robust bullish candlestick pattern formation, which resembles a Bullish Engulfing kind of pattern. On the monthly as well as weekly scale, too, there was a bullish candlestick formation.

MACD (moving average convergence divergence) indicated that the trend is positive while RSI and Stochastic also showed positive sentiments on the daily, weekly as well as monthly scales.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.