Home >Markets >Mark To Market >Auto sales revival remains in high gear, lending support to shares

The auto sector’s December volume sales show the recovery is accelerating well. Most segments have seen tidy improvement in wholesales during the month. That should keep auto stocks supported despite the Nifty Auto index gaining 20% in the past two months.

Markets did build in healthy December sales for the sector, particularly for passenger vehicle (PV) and tractor segments. However, some companies did better than expectations. Maruti Suzuki India Ltd’s December volume sales showed a good jump of 20% year-on-year (y-o-y), despite lower discounts. This should be seen in the context that PV sales taper during calendar year-ends.

“Broadly, the understanding was that four-wheeler sales will do better because of the low inventory levels at dealers. PVs are seeing mobility requirements increase particularly for the salaried class where there have been no cuts. People have saved more, and some of that is visible in discretionary spends such as auto," said Ashutosh Tiwari, head, research, Equirus Securities Pvt. Ltd.

Y-o-Y sales
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Y-o-Y sales

While two-wheeler sales have been steady, some companies, such as Hero MotoCorp Ltd, did not quite impress the markets with lower volumes. Sales for Hero was about 5% higher y-o-y, but was lower than estimates. Royal Enfield’s sales were far higher, though. TVS Motor Co. Ltd saw sales growth just about in line with expectations.

Rural demand is seeing signs of tapering off. Still, expectations are running high that sales will start picking up with earnings of small businessmen and low-income groups starting to normalize, said analysts.

In commercial vehicles, the goods segment is witnessing slow demand recovery. However, with passenger buses seeing lower sales due to limited use of shared mobility, the commercial vehicle space is expecting a bumpy recovery. Still, the growth rate for Tata Motors was marginally above expectations. A further pickup in activity could drive logistics demand, which could be beneficial for commercial vehicle sales.

Besides, low-interest rates are good for the sector. “The automobile sector remains a key beneficiary of recovery and low-interest rates," said Emkay Global Financial Services Ltd in a note.

The busy farm equipment sales season was expected to drive tractor sales. Escorts Ltd’s sales grew nearly 88%. Mahindra and Mahindra Ltd’s farm equipment segment also witnessed robust sales of 25% y-o-y.

Overall, FY21 auto volumes is expected to be about 20-25% lower than FY19 volumes, said analysts. Still, the outlook for auto stocks remains well-supported. “After this kind of drawdown, generally you start seeing a recovery in demand. When this demand and volume recovery happens, auto stocks tend to do well," said Tiwari. But high valuations could cap gains in the sector. The Nifty Auto index is at a lofty valuation of 28 times one-year forward earnings, as per Bloomberg data.

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