Moneycontrol Pro Panorama | A bumpy ride ahead for auto sector?

Investors could expect flatter operating margins or even a marginal decline in Q1 FY2025 from the year-ago levels. (Representative Image)

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It’s time for investors who are gung-ho about auto stocks to simmer down their expectations over returns in the coming quarters. Indeed, the Nifty Auto’s 68 percent return in the past one year was a massive beat over Nifty 50’s 26 percent. But there are good reasons to believe that such sizzling returns are unlikely to continue in FY2025.

Cues for the auto sector’s performance come from two key data points -- one, the demand for vehicles that is reflected in retail sales and two, the commodity prices that comprise a large portion of input costs. Both these together determine the profits and earnings posted by auto companies.

As for sales, FY2025 signals caution for auto investors. After April and May, June endorsed the moderating trend in auto retails, particularly in passenger vehicles (PV) and two-wheelers (2W). In absolute numbers, both the segments saw retail offtake sliding lower month after month since April. Even the year-on-year (yoy) growth in retails across auto segments showed slowing growth rates, when compared to the previous yoy period.

The reasons offered by industry veterans and dealers are numerous, ranging from high interest rates, waning of pent-up demand for vehicles used in personal mobility, inflation impacting vehicle prices as well as disposable income, and the like.

The upshot: rising inventory with dealers, rise in discounts offered on vehicles to dispose of stocks and gradually, a slowdown in wholesale despatches from companies that may be seen after a lag of a quarter or two. This time around Q1 FY2025 sales are already seen to be stuttering. Both PV and 2W wholesales by companies (in the listed domain) indicate a high single-digit yoy growth. Even market leaders in each segment such as Maruti Suzuki and Hyundai in PVs and Hero MotoCorp and Bajaj Auto in 2Ws reported slowing growth rates in sales offtake for the June quarter.

As for input costs, the rise in key commodity prices such as steel and rubber, the volatility in crude prices and the rise in fuel and energy costs will add up as posers to profitability. 

Therefore, investors could expect flatter operating margins or even a marginal decline in Q1 FY2025 from the year-ago levels. If this trend of slowing sales and rising input costs continues in the next couple of quarters, the earnings growth trajectory seen in auto companies in the past one year may hit a roadblock. 

Some analysts reckon that retail sales would pick up again in the second half of FY2025. Until then, investors could brace for a bumpy ride in auto stocks.
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