Plummeting sales in both urban and rural areas has led to high inventory levels
Productions cuts are likely to continue with threat to jobs in the sector too
The Nifty Auto index has declined nearly 18% since April, about three times the fall in Nifty 100 index. Apart from weak June quarter earnings, demand uncertainty and an overall slowdown in the economy have put investors on the back foot.
Among auto stocks, shares of original equipment manufacturers (OEMs) have been hit the hardest, with results indicating severe stress in vehicle sales. Not surprisingly, June quarter results were pathetic as double-digit decline in sales and negative operating leverage thereof took a toll on profit margins.
Exacerbating the situation has been the continued fall in vehicle sales, dashing hope of any revival in the current quarter.
For India’s passenger vehicle industry, it was the worst July in nearly 19 years, with sales slumping 31% to 200,790 vehicles last month, according to data released by the Society of Indian Automobile Manufacturers (Siam). It was the worst sales performance since a 35% decline in December 2000.
The sharpest sales drop was seen in commercial vehicles as the revision in axle-load norms and a fall in freight due to economic slowdown worked in tandem to pull down truck sales. Car and two-wheeler sales fared no better, and demand has been lackluster in both rural and urban region, leading to high inventory. Productions cuts are likely to continue, threatening more job losses in the industry and allied sector.
But the moot question is if there is more pain in the offing for investors.
Watch: Decoding the auto sector meltdown: Causes, effects and the way ahead
The Nifty Auto index has declined 36% in a about a year’s time. According to a report by Jefferies India Pvt Ltd “the correction in auto stocks since December 2017 has been in two parts. The initial six to 10 months was driven by valuation de-rating, while the last nine to 12 months saw earnings downgrades as the key driver of the correction."
From the valuation perspective, it does not look like auto stocks have hit the abyss. Indeed, the one-year forward price-to-earnings multiple of Nifty auto index has edged lower from 16.4 times on 1 April to 15.3 times on 13 August, but remains way higher than the decadal low of 8.3 touched on 1 June 2012.
That apart, management commentary from most firms indicates delay in recovery compared with earlier predictions of the second half faring better. “Therefore, the risk of further cut in earnings estimates for both FY20 and FY21 looms over the auto sector. This builds a strong case for more downside in stock prices," says Bharat Gianani, analyst at Sharekhan.