Why auto stocks outperformed broader market indices today
M&M surged nearly 17%, followed by Maruti Suzuki, up 13%. Tata Motors, Hero MotoCorp and Bajaj Auto gained 8-10%Covid-19 pandemic has exacerbated the woes of the industry already struggling with a slump in sales
NEW DELHI: The Nifty Auto and BSE Auto indices jumped over 10% in Thursday's trade, outperforming the benchmark Sensex and Nifty which rose 4% each.
The performance of auto stocks today can be confounding, given that covid-19 pandemic has exacerbated the woes of the industry which was struggling with a slump in sales because of a downturn in the domestic economy.
The virus outbreak disrupted global supply chains, as China, where it all began, had to shut down factories and ports to fight the virus. As a result, domestic automobile companies took a hit. Their sales slumped and companies were forced to cut production.
To put it in perspective, Maruti Suzuki India, which sells every second car in the country, sold 83,792 units in March, down 47% from a year ago. Mahindra & Mahindra reported an 88% slump in sales, while Tata Motors' passenger vehicle sales for March fell 68%, and sale of trucks and buses declined 87%.
Matters took a turn for worse when the government announced a 21-day lockdown to curb the spread of covid-19 as cases rose in India
In this backdrop, what explains today’s rally in auto stocks?
According to the experts, auto stocks have higher beta and have benefitted from the overall market rally.
"Auto stocks had been beaten down with substantial dislocation in price versus value. This resulted in very cheap valuations for most of the stocks. Autos have higher beta, which was reflected in auto stocks correcting higher than the markets and now recovering faster than the (broader) markets. Fundamentally, there is limited change given lockdown in India. While impact of coronavirus might delay recovery and make ongoing downcycle little longer, we expect volumes to start recovering from 2HFY21," explained an independent market analyst.
Beta is a measure of a stock's volatility in relation to the overall market. High-beta stocks are riskier but provide higher return potential, low-beta stocks pose less risk and hence lower returns.
"It is a bounce.. most of the companies were close to their bottom valuation. And when markets moved up, auto stocks moved faster as the fall was also higher," said Sandeep Raina, senior vice president, research at Edelweiss Wealth Management.
Healthy buying in auto stocks supported the benchmark indices in trade today. After hitting a high of 31,225.20, Sensex closed 1265.66 points or 4.2% higher at 31,159.62. Nifty advanced 363 points, or 4.2%, to close at 9,111.90.
Mahindra & Mahindra surged nearly 17%, followed by Maruti Suzuki, up 13%. Tata Motors, Hero MotoCorp and Bajaj Auto gained 8-10%.
Experts also point out that all auto stocks have not participated in this rally equally.
“Auto-ancillary companies typically have high operating and financial leverage model. Hence the impact of a lockdown in India and across major export markets would be more severe on auto-ancillary companies compared to that on auto OEM companies. Hence despite recent sharp rally, several auto ancillary companies are still underperforming overall index while auto OEMs with higher revenue from smaller towns and strong liquidity position are outperforming," Kumar Rakesh, Auto Analyst, BNP Paribas India said.
“With demand dramatically coming down, at least in the near-term, the companies with higher exposure to rural and smaller towns are likely to do better since these markets will likely open first. Companies with strong liquidity position that have the ability to absorb any likely cash burn in the coming months, will also do good," Rakesh added.
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