Experts see up to 15% growth in auto index in FY19; Maruti, M&M top picks

The automobile sector, which witnessed a healthy sales growth in the previous financial year (FY18) led by higher demand from rural markets and the fast growing SUV segment, should continue to do well in the new fiscal year (FY19) as well.

Analysts’ optimism stems from a pick-up in demand going ahead, which they expect not only from metros, tier-1 and tier-2 cities but also from semi-urban and rural areas. That apart, scaling up of investment, moves and initiatives taken by the government towards electric vehicles will have a sizeable impact on the demand going forward in FY19, they say.

“Our sense is that policy changes and implementation of the same by the government will enable higher demand. Scrappage policy and limitation in terms of carriage of tonnage has excited the commercial vehicle manufacturing companies to a great extent. GST (goods and services tax) and e-commerce demand has also given a flip to the orders coming in from fleet owners for the commercial vehicles,” said Gaurang Shah, head investment strategist at Geojit Financial Services.

Sales of passenger vehicles (PV) of the country's top six car makers cumulatively rose by about 11% in FY18, as compared to 9% growth in FY17. In this backdrop, S&P BSE Auto index which had surged 9.2% in FY18, as compared to around 12% rise in the S&P BSE Sensex, ACE Equity data show.

Shah expects the auto index to gain 12% - 15% in FY18.

Given the run-up seen in the last fiscal despite an improvement in the overall demand, A K Prabhakar, head of research at IDBI Capital feels the stocks remain ‘pricey’ at the current levels and investors should buy selectively only on a decline. A status quo by the Reserve Bank of India (RBI) in its upcoming monetary policy review and a good monsoon can rev up demand, especially for the commercial vehicles and two-wheeler segment going ahead, he says.

“I don’t fear drop in sales for the next six – eight months but the current valuation is too steep. If the central bank keeps the key rates unchanged then it will be positive for the markets and support auto stocks,” Prabhakar said.

Adding: “The demand from the rural sector will be dependent on this year’s monsoon forecast. The government is working on improving the rural segment, but it will not happen immediately. If the monsoon is good this year, then the two-wheeler sales and tractor sales will improve," Prabhakar said.

Among individual stocks, he prefers Ashok Leyland, followed by Mahindra & Mahindra (M&M) and Maruti.

Shah of Geojit, on the other hand, likes Maruti, M&M and Tata Motors. “Among two-wheelers, we are positive on Hero Moto Corp, TVS Motors, Eicher Motors and Bajaj Auto. We also like Ashok Leyland and Escorts,” he says.