Top auto stocks to buy: Unlock, normal monsoon hopes to boost June sales; check brokerage favourites

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June 30, 2020 3:29 PM

Nifty Auto index has rallied 42 per cent since March 23, when the nationwide lockdown was imposed to curb the fast-spreading coronavirus pandemic, as compared to a 36.35 per cent rise in S&P BSE Sensex

auto sales, June sales numbers, Maruti Suzuki, M&MAuto sales likely to see a surge in June over April and May on the back of pent-up demand, strong rural sentiments and rise in preference for personal mobility to follow social distancing norms.

Indian automobile sector set to witness improvement in June sales numbers following the unlock process, ramped-up economic activities, hopes of normal monsoon and pent-up demand from bookings from pre lockdown period. Due to coronavirus-induced nationwide lockdown, the auto sector faced zero sales in April. However, with the ease in lockdown restrictions, most of the automobile companies resumed partial operations in May, resulting in weak consumer demand. Analysts at research and brokerage firm Nirmal Bang say that the auto sales likely to see a surge in June over April and May on the back of pent-up demand, strong rural sentiments and rise in preference for personal mobility to follow social distancing norms.

The Nifty Auto index has rallied 42 per cent since March 23, when the nationwide lockdown was imposed to curb the fast-spreading coronavirus pandemic, as compared to a 36.35 per cent rise in S&P BSE Sensex. On Tuesday, the Nifty Auto index was up 1.12 per cent led by gains in Bosch (up 4.6 per cent), Maruti Suzuki (up 2.67 per cent), MRF (up 2.46 per cent), Eicher Motors (1.89 per cent) and Hero MotoCorp (1.8 per cent). While headline index BSE Sensex was trading flat in late afternoon deals on Tuesday.

“We expect Passenger Vehicle (PV) dispatches to improve sequentially but are likely to remain substantially lower on YoY basis. According to commentary from some PV OEMs, the industry is operating at around 40% level in June. Our channel checks suggest that urban demand lagged significantly than demand from smaller towns and rural India,” said analysts at Nirmal Bang. Among index heavyweights from the auto sector, brokerage firm expects Maruti to witness 58% on-year decline in sales volume on the gradual ramp-up of operations. For Mahindra and Mahindra (M&M), the brokerage firm expects tractor sales to see a marginal on year decline, as demand continues to remain strong on strong rural sentiments. “Automotive sales are likely to witness gradual recovery, especially in rural portfolio amid supply constraints,” it said.

Another research and brokerage firm Motilal Oswal Financial Services says that while demand has surprised, sustenance will be a key monitorable. “With multiple moving parts in the form of a) normalization of the supply side, b) consumer sentiment, c) availability of finance and d) impact of BS6 cost inflation, demand normalization is the biggest observable,” it said in a research report. Its top large-cap picks are Mahindra and Mahindra and Eicher Motors and among the mid-caps, it prefers Motherson Sumi Systems. It further said that recovery is being driven by necessity-based demand, with the major portion of sales coming from first-time buyers. “Maruti Suzuki is in a comparatively better position than peers owing to its entry-level portfolio,” said the brokerage firm adding that the volumes are expected to decline 44% for the company.

Research and brokerage firm EMkay Global Financial Services predicts improvement in volumes in coming quarters on the back of the low base and pent-up demand, better rural sentiments and gradual improvement in economic activity. Domestic passenger vehicle industry volumes are improving on a month-on-month basis but lower on a year-on-year basis. “Our interactions with dealers indicate that a shift toward personal mobility has also marginally supported volumes. Retails are better than wholesales,” it said in the report. It further added that domestic volumes could decline on a YoY basis, by 62% for Maruti Suzuki and 65% for Mahindra and Mahindra. It has recommended to ‘buy’ Maruti Suzuki stock with a target price of Rs 6,173, an upside of nearly 10 per cent. While it has pegged 13 per cent upside for M&M stock with a target price of Rs 572.

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