Passenger vehicle sales in February were much higher than analysts’ expectations, but hardly anyone in the Street is overly excited about them.
Most auto stocks, in fact, corrected after the sales numbers were released.
The consensus is that the better-than-expected performance is a blip and won’t last long. One of the main factors that’s helping passenger vehicle sales in recent months is the large payouts Union government employees have received, thanks to the implementation of the Sixth Pay Commission.
Recent cuts in excise duty seem to have helped increase sales as well. But according to an analyst with a foreign brokerage, another reason why February sales can be considered a blip is because the wedding season gained momentum. Anecdotal evidence suggests that secondary sales were also decent in February, which means that the sales reported by manufacturers reflect the trend in underlying demand. It’s not the case that inventories have been spruced up with dealers.
The industry is expected to report much lower growth in March and the outlook beyond that looks uncertain, given that the job market for private sector employees is bleak. While demand from the government sector is expected to continue, it must be noted that the number of government workers isn’t that large to drive industry growth for a long time.
The good news for the two-wheeler industry is that sales have been healthy despite the fact that loans for this segment aren’t coming by easily. An increasing proportion of sales is happening on cash payments. And, as pointed out earlier, demand from government workers is acting as a buffer and the situation isn’t as grim as some had expected. Still, all these positives and more are reflected in the share prices of auto makers. Most firms get double-digit valuations and Maruti Suzuki India Ltd and Hero Honda Motors Ltd trade at around 15 times earnings, implying strong double-digit earnings in the next few years. That seems quite stretched, especially keeping in mind that growth numbers reported recently are expected to soon be a thing of the past.
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