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Last Updated : Sep 03, 2019 06:26 PM IST | Source: Moneycontrol.com

Auto ka time aayega? Experts positive about auto stocks despite alarming August sales numbers

The sales numbers are alarming and challenges for the sector are mounting. At first glance, it looks logical to stay away from auto stocks.

Nishant Kumar @Nishantopines
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Almost all major auto companies witnessed a strong slump in sales during the month of August. Cumulatively, domestic passenger vehicle sales dropped 30.9 percent year-on-year (YoY) to 1,95,558 units in August 2019, falling for the tenth consecutive month.

The sales numbers are alarming and the challenges of the auto sector are mounting. At first glance, it looks logical to stay away from auto stocks, as a continuous fall in auto sales has hit the stocks hard.

However, some analysts see the beaten auto stocks as contrarian bets for a six-to-twelve-month horizon.

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"I am positive on some auto stocks with a six-to-twelve month view because these are brands which are going through a one-year cyclical slowdown after being the biggest wealth creators for eight-ten years," said Sanjiv Bhasin, EVP-Markets & Corporate Affairs at IIFL.

He pointed out that the clarification on norms for BS-VI transition, reduced depreciation and other measures in the offing bode well for the sector for the upcoming festive season.

Bhasin thinks the demand in the auto sector will increase because we have much room to grow and the current situation should be seen as an opportunity.

"In a population of 130 crore, we have just about 3 crore vehicles, which is less than 3 percent. China is close to 11 percent. So, we have a huge way to go. It is once in a 5-year opportunity when one can own good stocks because of the macroeconomic weakness," he said.

The auto sector has been in distress for over a year. Sales have been declining across auto segments amid the economic slowdown, deferral of purchases, slow lending and confusion among consumers over BS-VI transition and the auto sector – as a whole – has been under pressure for almost a year now due to these concerns.

However, the future does not look as bleak as the present.

"In the case of auto companies, both structural, as well as cyclical issues, have conversed to trigger a slowdown. However, it is most unlikely that the auto sales will fall more in the near future," said G Chokkalingam, Founder of Equinomics Research & Advisory.

Chokkalingam believes the upcoming festive season will arrest the downfall, followed by some improvement in the rural economy as monsoon deficit is nearly zero.

"Water storage is some 60 percent more than the 10-year average, which means even the rabi crop will be good. These short-term factors should arrest the downfall in auto sales," he said.

"Along with these short-term factors, the government's announcements for the auto sector will underpin the sector. A lot more will come for the auto sector from the government out of compulsion as the slowdown is worrisome. The sector may not jump to normal in the next six months, but the de-growth will stop. The worst is behind," he added.

August sales numbers

August auto sales numbers tell a sorry tale. The sector giant Maruti Suzuki India posted a YoY decline of 32.7 percent in its August sales.

Similarly, Tata Motors reported a 58 percent year-on-year (YoY) decline in its domestic passenger vehicle sales at 7,316 units in the bygone month.

Mahindra and Mahindra saw a YoY drop of 32 percent in the passenger vehicle segment in the month. Hero MotoCorp reported a YoY decline of 20 percent while Bajaj Auto reported a YoY decline of 13 percent in its August sales.

The Nifty Auto index itself fell most among sectors, down 35 percent against 4 percent fall in Nifty50.

Auto and auto components stocks, namely, Tata Motors, Motherson Sumi, Ashok Leyland, Eicher Motors, M&M, Bharat Forge, Exide Industries, TVS Motor Company, Maruti Suzuki and Apollo Tyres have plunged 30-54 percent in the last one year.

Even though Maruti Suzuki, Mahindra & Mahindra and Hero MotoCorp are facing the heat of the slowdown, Bhasin still sees opportunities in these stocks.

"There are four names under our coverage- Ashok Leyland in the MHCV segment, Maruti Suzuki in the passenger vehicle segment, Mahindra & Mahindra in the tractor space and Hero MotoCorp in the two-wheeler space," Bhasin said.

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First Published on Sep 3, 2019 09:10 am
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