Mumbai: The auto index has underperformed Sensex by a huge margin since demonetisation, hit by destocking ahead of the roll-out of the goods & services tax (GST) but analysts are upbeat, believing some of the laggards in the sector may now be a good bet.
“We are positive on the sector. It did get hit by slow demand growth and destocking woes ahead of GST, but that does not take away the conviction in the sector’s long-term growth prospects,” said Gaurav Dua, head of research at Sharekhan by BNP Paribas. “The underperformance of some of the stocks here could actually lead to value buying,” added Dua.
In the quarter ended June, auto companies’ earnings were impacted by destocking ahead of GST roll-out. Things did look up in the September quarter after companies restocking and as auto sales picked up before the festive season.
However, since October and post the festive season, demand cooled again and dispatches came down too as dealers cleared inventory.
BSE’s 30-share Sensex touched a record high of 33,865.95 points last week, and is down 1.63% since. It has gained 20.74% since demonetisation. But the auto index is up 12.03% since demonetisation on 8 November 2016, underperforming Sensex.
Half of the 14 auto index components have underperformed Sensex since demonetisation. These are: Bajaj Auto Ltd, Hero MotoCorp Ltd, Exide Industries Ltd, Cummins India Ltd, Mahindra & Mahindra Ltd, Bosch Ltd, and Tata Motors Ltd.
Dua pointed that demonetisation’s impact has been more profound on the two-wheeler and farm equipment segment, as relatively higher-end sales happened by cash. Destocking due to GST also hit these stocks.
Domestic passenger vehicle sales declined marginally to 2,79,837 units in October from 2,80,677 units in the same month last year, according to the data released by the Society of Indian Automobile Manufacturers (Siam) on Friday.
Car sales were down 5.32% last month, while motorcycle sales declined by 3.50%—part of a 2.76% fall in all two-wheeler sales.
According to Gautam Duggad, head of research at Motilal Oswal Securities Ltd, for Bajaj Auto and Hero MotoCorp, stock prices suffered as volumes were hit. “We like Bajaj Auto, but have a neutral rating on Hero Moto Corp,” said Duggad.
The underperformance of Tata Motors Ltd, which has declined 21.76% since demonetisation, is another factor.
“One key reason for the auto index to not fare well is also that Tata Motors, which has significant weightage has been underperforming,” said Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd.
For the September quarter Tata Motors Ltd, India’s largest automaker by revenue reported a three-fold jump in net profit in the September quarter from a year ago, thanks to strong performance by its UK unit Jaguar Land Rover Automotive Plc (JLR), and a better-than-expected show by its domestic business.
“Tata Motors posted good numbers, and there is strong pick-up in the domestic business, leading to sharp reduction in losses from the domestic business,” said Bodke. “It is a dark horse, and it is about time that the stock is included in people’s portfolio. The stock looks attractive from a medium-term perspective,” he added.
Duggad, too, shared Bodke’s view that Tata Motors’ underperformance weighed on the auto index.
Duggad said the brokerage had upgraded fiscal year 2018 and 2019 profits by 23% and 6% respectively, on the back of better-than-expected performance and had maintained its buy rating on the stock.
Apart from the stocks in auto index, auto ancillary stocks such as Gabriel India Ltd, Jamna Auto Industries Ltd, Balkrishna Industries Ltd which cater to the replacement market, have seen a surge in their stock prices. These stocks have jumped 62.76% , 38.99% and 89.35% respectively since demonetisation.
The unorganized sector had a huge market share in the replacement market. With demonetisation and GST, the organized sector has gained immensely, in turn benefitting these companies, analysts said.
“Also majority of ancillaries in the auto index are not the India story. Bharat Forge Ltd and Motherson Sumi are such examples. So, demonetisation and GST did not impact as much,” said Dua.
Analysts said that smart outperformance of certain stocks were stock-specific stories. TVS Motor Co. Ltd, rose nearly 82%, riding on the story market share gain in the segment, which has been the case for few years now.
Maruti Suzuki India Ltd, which is capturing market share on the back of successful new launches, also logged a stellar 44.21% gains in the period.