Auto stocks are cruising towards safety faster than Nifty, Sensex; should you buy, sell or hold?

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Published: June 23, 2020 4:26 PM

After having fallen dramatically in February and March due to supply chain disruptions and already slowing down demand, auto stocks are now turning outperformers on stock markets, beating benchmark indices Sensex and Nifty by a large margin.

Among the best performers in the sector have been, Mahindra & Mahindra which is up 81% since April began, Motherson Sumi which is now trading with 64% gains in the same time frame.

After having fallen dramatically in February and March due to supply chain disruptions and already slowing down demand, auto stocks are now turning outperformers on stock markets, beating benchmark indices Sensex and Nifty by a large margin. Since the easing of restrictions in April, the Nifty Auto Index has jumped 42.3% while Sensex and Nifty have only managed a 21% recovery. Analysts say the sector has been helped by multiple reasons helping the sector, including the expected demand for two-wheelers and personal vehicles. The healthy tractor sales coming in from rural India.

Brokerage and research firm Motilal Oswal in a recent research note attributed the recent surge in auto stocks to the kickstart of economic recovery, where quick recovery in tractors, followed by two-wheelers and personal vehicles is being witnessed. The report claims that by mid-June, demand for the auto sector has recovered to 60–100% of pre-coronavirus levels across segments. “Valuations have now recovered, with ~20% of stocks trading at less than 15% discount to 10-year average P/BV, ~40% above 1SD below mean and with ~40% of stocks below 1SD.  Also, implied terminal growth at CMP has also increased to an average of ~5.4% from an average of 3.7% earlier,” the report said. With this, the brokerage said that auto stock valuations have normalized to growth stocks from deep value.

Among the best performers in the sector has been, Mahindra & Mahindra which is up 81% since April began, Motherson Sumi which is now trading with 64% gains in the same time frame, and Hero Motocorp jumping 52%. Tata Motors has also seen a rise of 47% while Eicher Motors has surged 37%. Motilal Oswal has a BUY call on Eicher Motors, Maruti Suzuki, Tata Motors, Mahindra and Mahindra, and Ashok Leyland. While among auto ancillaries Bharat Forge, CEAT, and Motherson Sumi are recommended.

Although the auto sector has gained massively, analysts advise investors to remain cautious. “This is a contra bet right now, the retail side visibility was pretty lower earlier so now the companies are posting quarterly numbers, that will give clarity on the delar side inventory level. It is a contra bet so investors should be cautious when dealing with higher valuation stocks,” Saji John, Auto Analyst at Geojit Financial Services told Financial Express Online. Sajo John added that tyre stocks are better placed owing to their linkages to the agricultural sector which is going strong on expectations of a good monsoon season.

Brokerage firm Edelweiss too is not too upbeat on the sector, downgrading the sector to Neutral. The brokerage said that the demand outlook is muted for the sector and the recent surge in stock prices leaves no margin for safety in auto stocks. “As a result (of the recent surge in share prices), valuations have mean-reverted to five years’ average versus a deep discount earlier. Hence, there is a limited margin of safety, compelling us to downgrade our view on the sector to Neutral,” it said.

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