Auto stocks on a bumpy road; these key worries to weigh for another year

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Published: July 9, 2019 5:03:19 PM

Rising input costs, falling gross domestic product or GDP growth and weak demand are likely to weigh on the stocks of automobile companies in the current financial year, according to analysts.

auto, auto sector, auto industry sales, global auto market sales, Tata Motors sales, Royal Enfield sales, Maruti sales, Hero sales, Ashok Leyland sales, M and M tractors sales, Bajaj sales, TVS salesAuto stocks’ performance to get adversely affected in one year, analysts say

Rising input costs, falling gross domestic product or GDP growth and weak demand are likely to weigh on the stocks of automobile companies in the current financial year, according to analysts. Moreover, the recent imposition of additional cess on petrol, diesel prices and increase in duties on auto parts can further trigger distress in the auto sector. The investors are unlikely to make money in the current scenario over a period of one year. The bottom line of auto OEMs (original equipment manufacturers) and ancillary companies will also see a slump because of falling margins. 

“Things are not looking up in the automobile sector. Except for petrol cars, all segments will have a good amount of price increase. The demand will be weak for a year considering fears of economic slowdown and rising input costs. We might see a jump in sales for one or two months in auto sales but that is not going to push overall numbers. There might be a slump in demand and the next one year is going to be very tough for the auto sector,” Ashutosh Tiwari, Head of Research, Equirus Securities told Financial Express Online. 

Reliance Securities also see a decline in the automobile sector in view of higher costs of raw materials, negative operating leverage and higher expenses due to discounts and incentives. It expects a decrease in auto companies’ revenue by 7.5%. Its report said, while there would be a decline of 30% in the net profits of OEMs, the ancillary companies will also witness a fall of 28% on-year. According to the brokerage firm, the auto sector excluding Tata Motors is likely to report a decline of 25% YoY and 20% QoQ decline in profit after tax or PAT. Including Tata Motors, the PAT is expected to fall by 30% YoY and 55% QoQ. 

“We expect Bajaj Auto and CEAT to report a marginal drop in PAT, while Ashok Leyland, Maruti Suzuki, Escorts, M&M, RK Forging, JK Tyre and Apollo Tyre to deliver highly subdued performance with significant YoY drop in net profit. Tata Motors with higher contribution from JLR is expected to see the sizable financial impact due to highly subdued JLR volume amid a slowdown in its key markets coupled with a double-digit drop in standalone volumes,”  Reliance Securities said in a report.

The auto industry is expected to report muted volume performance in the first half of FY20, though it would improve in the third quarter of FY20 with pre-buying ahead of BS-VI implementation, according to Reliance Securities which maintained a cautious view on the sector.  Bajaj Auto is gaining market share and after the price cut, footfall in the showrooms have also gained traction, according to Ashutosh Tiwari of Equirus Capital. Even when Bajaj Auto was launching decent models, there was no demand, but now the new models have also converted in sales, he said. “I am negative on Maruti Suzuki. It has seen the peak of its market share. When the competition is such that there are discounts on products, I don’t see margins improving for the company. Anybody who is looking at auto stocks will not make money this year,” Tiwari told Financial Express Online. 

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