Multiple headwinds cloud auto outlook

Rising cost of ownership, raw material inflation to impact volumes, margins

Led by two-wheeler stocks that have lost up to 5.3 per cent, the BSE Auto Index was among the highest sectoral losers, shedding 2.3 per cent in trade on Friday.

Including Friday, the index has dropped over 20 per cent since the start of the year as compared to gains of 6 per cent for the benchmark

Sensex.

There are multiple headwinds plaguing firms in this prices are on the space. The biggest concern uptick, gaining up to 16 per for the auto sector is decline cent over the last year. The in volumes, on the back of rupee depreciation is compounding higher product prices and the problem. running costs. Joseph While firms have George and Suraj Chheda of increased prices, it will be IIFL indicated in a report difficult to pass on the entire earlier this month that total cost burden as this might ownership cost of passenger impact volumes in the festive vehicles and two wheelers season. Analysts expect was up 6-7 per cent year-onyear, margins for companies like primarily driven by a Maruti Suzuki to fall by up sharp rise in fuel cost. to 80 basis points in FY18.

Second, after the Hetal Gandhi, Director, Supreme Court directive CRISIL Research, says players making long-term third party in two wheelers, cars and insurance mandatory, UVs will be impacted higher upfront costs of vehicles has than CVs, which will be risen. Third, with costs for cushioned due to higher volume auto financiers rising, analysts growth. expect auto loans to Among two wheelers, become more expensive, Bajaj Auto is the best adding to the cost burden. placed, given strong volumes Of these, the rise in fuel for its higher-margin costs is the single-biggest three wheelers and a larger deal breaker. Petrol and share of exports that gives it diesel prices have risen by a a natural hedge. Mahindra sharp 16-25 per cent since and Mahindra (M&M) is the start of the year, which also in a good position, given could cause delay in new its high market share in purchases. the tractor space, new

While analysts have not launches in the utility vehicle yet downgraded their volume segment, and a larger forecasts, growth is exposure to the growing expected to slow down in rural market. the second half of the current While there are multiple fiscal, if costs keep spiraling. concerns in the sector, Bharat Gianani of

The other worry is rising Sharekhan says the correction raw material costs that will in the auto space can impact profitability. This be used to buy stocks of will impact firms especially auto firms with leadership if volumes soften, and passing position and strong financial on raw material costs muscle such as Maruti might lead to loss in market and share. M&M. Steel and aluminium