India remains a growth market for auto sector over the medium term on low penetration and increasing aspiration levels.
Auto and auto ancillaries stocks are likely to perform better in the coming quarters of the current fiscal year on the back of the low base and pent-up demand, better rural sentiments and a gradual pick-up in economic activity. The Nifty Auto index has rallied nearly 60 per cent since March 24 in comparison to a 44 per cent rise in the benchmark Nifty 50 index. Now, the Auto index is back to the levels of February 2020. According to HDFC Securities, this rally has been driven by a host of factors such as recovery in volumes for rural segments or increased preference for personal mobility, improved focus on capital allocation, and benign sector valuations.
Research and brokerage firm Emkay Global Financial Services said that the key risks in the auto and auto ancillaries sector include delays in economic recovery, increase in competition intensity, adverse movement in currency/commodity prices, etc. “Q1FY21 is a puncture, not a breakdown,” said the brokerage firm. Led by expectations of a recovery in the sales cycle, the brokerage firm is positive on this sector. It said India remains a growth market over the medium term on low penetration and increasing aspiration levels. Its top picks are Eicher Motors, Mahindra & Mahindra, Escorts, Ashok Leyland, Amara Raja and Motherson Sumi Systems.
Around 1.15 PM, Nifty Auto index was trading nearly half a per cent lower in Tuesday’s trade dragged by losses in Bharat Forge, Motherson Sumi Systems, Ashok Leyland, Exide Industries, Mahindra and Mahindra (M&M), TVS Motors, Balkrishna Industries and Maruti Suzuki, all down in the range of 0.65-2.53 per cent. While the broader Nifty 50 index was trading 0.56 per cent or 0.60 points lower at 10,753.
After the gradual lifting of coronavirus-led nationwide lockdown over the past two months and recovery in demand, auto stocks have gained. HDFC Securities has a buy rating on Maruti Suzuki, Hero MotoCorp and Escorts. With the government rolling out structural reforms in the agriculture sector, farm incomes will improve and promote the mechanisation of agriculture. “We believe that Escorts will strengthen its tractor product portfolio, which will drive market share gains. Escorts will benefit from Kubota’s expertise in mechanised equipment. As Indian farming practices mature, this segment is expected to benefit. We believe that Escorts will be well-equipped to gain from this shift,” it said.
Given the dominant position in the entry-level or compact car segment, the brokerage firm believes Maruti Suzuki will withstand the downturn due to its scale and robust balance sheet. While Hero Motocorp is well-placed in the current cycle due to its higher exposure to the rural segment or entry segment portfolio.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)