Auto stock rally may lose steam: Analysts
Demand decline and supply-side issues are key headwinds
After a phenomenal run since March 2020 low that saw the Nifty Auto index jump 132 per cent, against a 93 per cent gain in the Nifty50, the rally in auto stocks may pause for now as demand cools off and companies grapple with supply-side issues, say analysts.
Valuations at which some of the auto stocks are currently trading are also a concern. “PV manufacturers are trading at expensive valuations and I do not find much comfort there. Instead, investors can look at two-wheeler manufacturers and auto ancillaries. They are a better bet given the current industry dynamics. Overall, the blanket rally in auto stocks is likely to take a breather for now,” says G Chokkalingam, founder and chief investment officer at Equinomics Research.
At the bourses, most auto stocks have done well since their March 2020 low. Among the lot, commercial vehiclemaker Ashok Leyland and Tata Motors have surged 280 per cent and 374 per cent, respectively. Mahindra & Mahindra (M&M), Motherson Sumi, Bharat Forge, Hero Motocorp, and Maruti Suzuki have gained between 70 per cent and 232 per cent during this period.
On their part, auto companies are now witnessing with a decline in sales with the easing of pent-up demand, besides supply-side issues related to raw material.
Retail sales of automobiles dropped nearly 10 per cent in January 2021 to 1,592,636 units (two-wheeler, threewheeler, passenger vehicles or PVS, commercial vehicles or CVS, and tractors) from 1,763,011 units a year ago, the data shows. This, reports suggest, was triggered by the shortage of semiconductors, price hikes undertaken by companies, and waning demand.
“The performance of auto stocks going ahead will be polarised. Though demand is still there, the waiting time for supply, especially select models of PVS, has gone up tremendously due to shortage of parts, such as semiconductors. Companies that have a strong supply chain will continue to deliver. Stocks of such manufacturers will do well. The across-the-board run-up is likely to pause,” says A K Prabhakar, head of research at IDBI Capital.
On the regulatory front, the government has proposed a Green Tax, under which vehicles older than eight years would be charged additional 10-50 per cent of road tax annually; PVS would bear higher costs on registration renewals after 15 years of use. However, electric vehicles (EVS), CNG vehicles, and tractors would be exempted.
The move, analysts say, will not meaningfully help increase vehicle sales, especially those of CVS due to the cost involved. A 10-tonne truck, according to a Jefferies’ note, incurs an annual road tax of ~3,800 in Delhi and will now have to spend an additional 50 per cent, i.e. ~1,900, as Green Tax, which is just 10-20 basis points (bps) of the price of a new vehicle.
“The additional tax will also form just about 1-2 per cent of a new vehicle price over the lifetime of a CV. We believe this might not be a sufficient trigger to switch away from older vehicles and additional incentives would be needed to promote replacement,” wrote Nitij Mangal and Sagar Sahu of Jefferies in a January 26 note.
The scrapping of government-owned vehicles older than 15 years, likely to come into effect from April 2022, is another regulation with good intent, but may not be able to meaningfully impact auto sales, say analysts.
“We believe that the number of vehicles owned by the government would be very small, and thus it would have a limited impact in its current form on demand for passenger vehicles (PVS) and Medium and Heavy Commercial Vehicles (MHCVS),” said Kapil Singh and Siddhartha Bera of Nomura in a recent report.
Describing India as one of the most important partners of the US in the Indo-pacific region, the Biden administration on Tuesday said that it welcomes India’s emergence as a leading global power and its role as a net security provider in the region.
“India is one of the most important partners in the Indopacific region to us. We welcome India’s emergence as a leading global power and its role as a net security provider in the region,” State Department Spokesperson Ned Price told reporters at his daily news conference.
Earlier in the day, he said, Secretary of State Tony Blinken spoke with his Indian counterpart, External Affairs Minister S Jaishankar, for the second time in less than a fortnight. During the call, the two leaders reaffirmed the strength of the Us-india partnership and discussed issues of mutual concern, including the situation in Myanmar.
Blinken expressed concern over the military coup and the importance of rule of law and the democratic process in Myanmar. They also discussed regional developments, including the value of Us-india cooperation
across the Indo-pacific. “Both sides look forward to expanded regional cooperation, including through the Quad, and to address the challenges of Covid and climate change,” Price said.
Responding to a question, Price said the Us-india Comprehensive Global Strategic Partnership is both broad as well as multi-faceted.
“We’ll continue to engage at the highest levels of our government to deepen cooperation on many fronts, and we are confident that the strong and upward trajectory of our partnership will, in fact, continue,” he told reporters.
India and the US, he said,
cooperate on a wide range of diplomatic and security issues, including defence, nonproliferation, regional cooperation in the Indo-pacific, counterterrorism, peacekeeping, the environment, health, education, technology, agriculture, space and oceans.
“We also work closely in international organisations, and we welcome India joining the Security Council in last month of this year for a twoyear term,” Price said.
The United States, he noted, also remains India’s largest and most important trading partner, with total bilateral trade increasing to $146 billion in 2019.