Auto stocks see gains on hopes of monsoon revival, government stimulus
- The Nifty Auto index has risen 1.57% this month, with Maruti and Hero MotoCorp reaping healthy gains
- The rise in auto stocks contrasts with the weak sales performance by the sector for about a year
Automobile stocks made robust gains in August, partly recouping their losses this year, on hopes that a monsoon revival, drop in dealer stocks and an expected stimulus package from the government would boost demand.
The Nifty Auto index has risen 1.57% so far this month, with some companies such as Maruti Suzuki India Ltd, the country’s largest carmaker, and Hero MotoCorp Ltd, the largest motorcycle producer, reaping healthy gains.
The rise in auto stocks contrasts with the weak sales performance by the sector for about a year. A bevy of factors such as economic uncertainty, rise in ownership costs and volatile stock markets contributed to the tepid show.
The paradox is witnessed in other sectors too. For instance, despite a depreciating Indian currency, IT stocks have not performed well in August.
The rupee has weakened 3.7% so far, but the Nifty IT Index has shed 1.31% in August. A depreciating rupee translates into higher revenue in rupee terms for the export-focused software companies. Despite this, major IT stocks such as Infosys Ltd, Tata Consultancy Services Ltd and Wipro Ltd have declined 2-5% this month.
Analysts said the April-June period was a weak quarter for domestic software companies in terms of earnings and the outlook also appears bleak.
Still, Hero MotoCorp surged 11.7% so far this month, while Bajaj Auto Ltd gained 8.31%. Maruti Suzuki rose 9.38% during the same period.
Hero MotoCorp, Maruti Suzuki and Bajaj Auto together constitute 43% of the total weightage of the Nifty Auto Index. The Nifty Auto index dropped 13.6% in July and has declined 24.7% year to date. In comparison, the benchmark Nifty is up 1.76% so far this year.
Analysts said the reasons behind the gains in auto stocks include healthy rainfall ahead of the crucial festive season, substantial production cuts to arrest the mounting vehicle inventory and positive outcomes of the recent meetings between the auto industry and finance ministry representatives, along with Prime Minister Narendra Modi’s assurance that internal combustion engine vehicles can coexist with electric vehicles.
The auto industry, which is witnessing one of its longest demand slumps, reported its worst performance in the past two decades in July when the passenger car segment recorded a 31% decline in wholesales from a year earlier. That apart, as the industry is bracing for the transition to Bharat Stage VI emission norms from 1 April 2020 that will result in a substantial price rise across vehicle categories, the proposed mandate to ban all internal combustion engine-driven three-wheelers from 2023 and all petrol two-wheelers below 150cc from 2025 has caused uncertainty, further impacting consumer sentiments.
“Monsoons were scant in June. Later in July-August, rainfall has been better than earlier expectations. Auto companies such as Maruti Suzuki, Hero MotoCorp and Bajaj Auto have high rural exposure. Secondly, hopes of government stimulus and the statements made by PM Modi have impacted positively,” said Chirag Jain, an analyst at SBICAP Securities.
Citing similar reasons, Mitul Shah, an analyst at Reliance Securities, said: “Auto stocks were highly beaten down in anticipation of poor Q1 results and negative sentiments. However, they turned out to be relatively better. There are positive ongoing discussions between the industry and the government lately and the monsoon deficit is narrowing, which will clearly improve consumption in the rural economy.”
Investors are also hoping for a recovery in volumes, with Maruti Suzuki set to launch two new passenger cars, while Bajaj Auto has recently launched its most affordable Pulsar 125cc motorcycle.
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