Auto stocks may not accelerate

Valuations are attractive but the sector is facing multiple headwinds

Auto stocks are likely to continue with their underperformance, as most companies in the sector grapple with multiple headwinds, including semiconductor shortage, rising input costs, and ICE automobiles facing competition from electric vehicles (EVS). Although stock valuations have turned attractive, investors may be better off avoiding auto stocks for now.

“The auto sector is facing multiple headwinds, such as high raw material prices and chip shortage. The traditional four-and two-wheeler segments also face stiff competition from the electric vehicle (EV) segment. Though valuations are attractive, auto stocks will remain under pressure. It is a long road to recovery for them,” said A K Prabhakar, head of research, IDBI Capital.

At the ground level, chip shortages, according to analysts at Jefferies, have already started to hurt Indian auto production and companies -- such as Maruti, Bajaj Auto, and Royal Enfield -- have witnessed an increased impact in the September quarter (Q2FY22). Maruti Suzuki, for instance, expects its vehicle production in September across its plants in Haryana and Gujarat to drop 60 per cent because of chip shortage.

Raw material costs have been another sore point for Indian automakers. The Indian steel price, according to reports, is at an all-time high of ~67,500 a tonne, 5 per cent above the

June quarter average. The spot aluminium price at $2,674 a tonne is also 12 per cent higher than the June quarter average.

To counter the rise in input costs, Maruti is hiking prices across the board from September — the fourth such increase this year. While the hikes were minimal in the past three rounds, analysts expect the one in September to be steeper, given the rise in prices of raw materials, such as steel, aluminium, and copper.

“Asian steel prices are holding up despite a sharp fall in iron ore. Slowing credit growth has raised concerns about Chinese metal demand, although a seasonal pick-up in construction and infra stimulus should provide tailwind; potential production cuts could also tighten supply in the second half of the calendar year 2021 (H2CY21),” wrote Nitij Mangal and Sagar Sahu of Jefferies in a recent report.

Besides the four-wheeler segment, demand for two-wheelers, according to analysts at JM Financial, is being impacted by commodity-related price hikes, increase in fuel prices, the impact on disposable income due to the second Covid-19 wave, and a cautious stance of consumers, given the possibility of a third wave of Covid-19 infections.

“Enquiry levels are also lower than normal. Footfall is low as a large share of enquiries is shifting online. There have been instances where customers have delayed purchase in the anticipation of the launch of EV products from the existing OEMS/OLA Electric,” wrote Vivek Kumar and Nitinn Aggarwala of JM Financial in a recent report. Moreover, with volumes getting impacted, low operating leverage will further hurt the operat- ing profit margins of automakers.

At the bourses, the Nifty Auto index has been the worst performer among sector indices thus far in FY22, up just 1.8 per cent as compared to around a 16 per cent rise in the Nifty50 index, the ACE Equity data shows. Mahindra & Mahindra (M&M), Tata Motors, and Maruti Suzuki in the fourwheeler pack and TVS Motor and Hero Motocorp in the two-wheeler segment have given below-par returns.

“Pent-up demand for automobiles will fade away soon as people take to public transport after being vaccinated against Covid. That apart, chip shortage, rising fuel costs for consumers, and firm input costs for auto manufacturers will keep demand in check. As a result, most auto stocks will underperform in the second half of FY22,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.