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Last Updated : Apr 03, 2020 01:39 PM IST | Source: Moneycontrol.com

Weakness seen in auto sector in April as well; bet on these 5 stocks

Brokerages foresee uncertainty and negative or March-like growth in the coming months.

Sunil Shankar Matkar
 
 
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Automobile sales fell sharply in March, hit by the 21-day nationwide lockdown announced by the government to control the spread of the novel coronavirus.

Every segment—two-wheeler, cars or commercial vehicles—have recorded a double-digit decline in sales despite heavy discounts, as manufacturing plants closed and dealers downed the shutters.

"The spread of COVID-19 in India along with proactive nationwide lockdown resulted in the suspension of manufacturing facilities in the latter half of the month, hurting production and dispatches. At the retail level, closure of showrooms took a heavy toll on registrations despite hefty discounting amid what is normally a festive period in some regions," ICICI Direct said in a note.

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The “black swan event” coincided with the shift to BS-VI emission norms, thereby affecting the liquidation of BS-IV inventory as well as a ramp up of BS-VI production, it added.

The March numbers for the industry are not comparable to last year or the previous quarter as it will go down as a one-off month.

Wholesale dispatches were down anywhere between 40 percent and 90 percent YoY, with original equipment manufacturers (OEMs) better placed on BS-IV inventory front outperforming relatively.

In the passenger vehicle segment, the country's largest carmaker Maruti Suzuki reported a 47 percent YoY decline in sales to 83,792 units, while Tata Motors' domestic passenger vehicle sales dropped by 72.1 percent YoY to 5,676 units and M&M reported a 87.9 percent decline at 3,111 units YoY.

Among two-wheelers, Bajaj Auto registered a 34.8 percent decline in sales, outperforming others despite a 55.3 percent drop in domestic sales, while its exports increased 8.9 percent YoY.

Royal Enfield division of Eicher Motors posted a 41.1 percent fall at 35,814 units, while industry leader Hero MotoCorp's total volumes for March dropped 42.4 percent YoY to 3.34 lakh units.

The commercial vehicle segment continued to underperform other segments, though automakers tried to push sales with hefty discounts.

Tata Motors registered an 89 percent decline in sales at 5,336 units, with domestic commercial volumes falling by 90 percent YoY in March led by 90 percent decline in M&HCV volumes, 85 percent decline in I&LCV volumes, 95 percent decline in SCV and pick up segment and 77 percent volume decline in passenger carriers volume.

"The company highlighted retail volumes were 16 percent higher than off-take in March 2020. The company highlighted that all BS-IV vehicles have been retailed barring few registrations which got halted due to lockdown," said Kotak.

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Ashok Leyland reported an 89.9 percent fall in sales at 2,179 units and M&M 90.5 percent YoY drop at 2,325 units, while Eicher Motors' VECV segment posted an 82.7 percent YoY decline in sales at 1,499 units.

Unaffected by BS-VI switchover, the tractor segment remained a relative outlier, ICICI said. Market leader M&M’s total volumes fell 30.9 percent YoY to 13,613 units while Escorts volumes dropped 54.3 percent YoY to 5,444 units.

Brokerages foresee uncertainty and negative or March-like growth in the coming months.

"The market environment is quite negative currently, as there is uncertainty regarding the lifting up of the lockdown period. In such a scenario, OEMs posted a very sharp sales decline in March, which we have never seen before. The broad trend has been very negative across segments. Such a weakness will be most probably carried forward in April too," LKP Securities said.

It will take a few months for things to normalise, it said.

Indian shares, too, have plummeted during this period, with benchmark indices declining 34 percent.

The BSE Auto index has corrected 2 percent after March performance, with Tata Motors, TVS Motor, Motherson Sumi, Maruti Suzuki, M&M, Hero MotoCorp, Ashok Leyland, Bajaj Auto and Balkrishna Industries falling 2-7 percent.

The auto index has crashed 45 percent from the high seen in January.

"...thus making all the stocks look very attractive on valuations, however, we are not sure about the bottoming out of the markets. The long-term drivers of the sector remain intact," said LKP.

Motilal Oswal has maintained “buy” call on five auto stocks, though it has lowered its volumes and EPS estimates for FY21/FY22 factoring in the impact of coronavirus.

Here are the five stocks on which Motilal Oswal has a “buy” call:

Maruti Suzuki: Buy | Target: Rs 5,900 | Return: 39 percent

Motilal Oswal estimates FY21 volumes to decline around 2 percent YoY (against earlier estimates 8.5 percent growth) due to the coronavirus-triggered slowdown.

"We are lowering EPS estimates for FY21/FY22 by around 24 percent/21 percent respectively to factor in for the impact of coronavirus on demand. The stock trades at 21.4x/15.8x FY21/FY22E earnings. Maintain buy," said the brokerage.

Mahindra & Mahindra: Buy | Target: Rs 426 | Return: 56 percent

The research firm lowered its EPS estimates for FY21/FY22 by around 18 percent each. "The stock trades at 9x/8.1x FY21/FY22E consolidated EPS. Maintain buy."

Tata Motors: Buy | Target: Rs 111 | Return: 64 percent

"We are lowering EPS estimates for FY21/FY22 by around 94 percent/66 percent respectively to factor in for the impact of coronavirus on demand in India and JLR. The stock trades at 2.4x/2x FY21/FY22E EV/EBITDA. Maintain buy," said Motilal Oswal.

Ashok Leyland: Buy | Target: Rs 67 | Return: 63 percent

The brokerage reduced its EPS estimates for FY21/FY22 by around 38 percent/21 percent respectively. "The stock trades at 12.7x FY22E EPS and at 6.5x FY22E EV/EBITDA. Maintain buy."

Eicher Motors: Buy | Target: Rs 18,280 | Return: 41 percent

Motilal Oswal cut its Eicher's EPS estimates for FY21/FY22 by around 15 percent/16 percent, respectively. "The stock trades at 17.4x/13.8x FY21E/FY22E consolidated EPS. Maintain buy," it said.

Disclaimer: The views and investment tips expressed by 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.

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First Published on Apr 3, 2020 01:35 pm
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