Home / Markets / Mark To Market /  Auto stocks shed gains as demand outlook hazy after lockdown eases

The Nifty Auto index nosedived 7.2% on Monday following reports of zero sales by automakers in April because of the nationwide lockdown. A partial relaxation of the lockdown in notified covid-19 zones from Monday is also unlikely to fuel near-term demand.

The resultant weak June quarter (Q1 FY21) combined with a wobbly recovery thereafter would lead to a washout for auto sales in FY21, say analysts. “We expect 1QFY21 year-on-year (yoy) contraction of 74%-77% for passenger vehicles (PVs), two-wheelers, three-wheelers and commercial vehicles," said BNP Paribas Securities India Pvt. Ltd in a report. There could be a sequential recovery led by pent-up demand in the remaining quarters, but it may be offset by the BS-VI price hike impact, it added.

Hitting the skids.
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Hitting the skids.

The lockdown came at a time when auto sales were already slowing. This led to a worsening of consumer sentiment as income levels plunged because of pay cuts and, in some cases, job losses. As such, discretionary spending is expected to be hit, at least for a few quarters. This would weigh mostly on two-wheelers and PVs, a trend seen even during demonetization.

“Our analysis of post-demonetisation demand trends showed that passenger vehicles and tractors demand recovery to pre-demonetisation level was sharp and took place within 3 months. However, two-wheelers and three-wheelers took 9-15 months to get back to pre-demonetisation levels," said BNP Paribas.

It would also take time for dealerships to resume operations, given a large number of them are singed by severe liquidity problems. To make matters worse, dealers are unlikely to open in a hurry as most metro cities and urban areas are classified as “red" and “orange" zones.

Besides, most original equipment manufacturers have BS-VI vehicle inventory of at least three-four weeks. This, along with supply-chain disruption, will prevent firms from ramping up production. The consequent negative operating leverage will weigh on profitability. Most companies are likely to post record operating losses, given that fixed costs are being met without any cash flows, according to analysts.

Thus, it is not surprising that the 28% rise in Nifty Auto index since end-March has snapped.

“Investors have realized that the easing of the lockdown will not benefit auto sales in the near-term. The euphoria on the Street after China’s auto sales bounced back when the lockdown was lifted is waning," said Mitul Shah, vice president (research) at Reliance Securities Ltd.

The silver lining is that industry and market surveys suggest that consumers may be averse to public transportation, which could boost sales of PVs and two-wheelers. Further, with lockdown restrictions eased in the rural and semi-urban areas and forecast of a normal monsoon, there is hope that rural auto sales may drive demand.

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