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Buy another day! Perkiest stocks of past years leave investors stranded

Most analysts are cautious and say investors should stay away from auto stocks.

Updated: May 14, 2019, 01.47 PM IST
Shares of India’s auto bellwether Maruti are down 12 per cent this year, with the trailing price to earnings ratio falling to 26 against a five-year average of 29.4.

Tata Motors trades flat on a year-to-date basis, but down 50 per cent from its 52-week low. Its trailing PE is down to 37.13 from a five-year average of 68.3. Utility vehicles maker M&M’s shares are down 20 per cent year to date; PE down to 15.25 from 22.5.

It’s not even a bumpy ride, auto stocks are crawling in one of the world’s most vibrant consumer markets. Stocks of the biggest industry names, shiniest till a few months back, have ‘sell’ ratings in stock market.

On Monday, India’s auto industry lobby SIAM reported worst car sales in the country in April in nine years, with a 17 per cent year on year plunge in passenger car volumes, 6 per cent drop in commercial vehicle sales, 8 per cent decline in three-wheeler numbers and 16 per cent fall in two-wheeler sales.

Auto stocks have eroded around Rs 3 lakh crore in investor wealth in last 16 months. The BSE Auto index is among the worst sectoral performers year to date, with an 11 per cent drop.

On Dalal Street, any mention of the auto stocks now draws a blank look. Analysts lack conviction on a set of stocks they were gung ho on till about a year back.

The reasons are many:

· Consumer sentiments have been hit by liquidity crunch, a spike in auto insurance cost and the recent surge in crude oil prices.

· Rural consumption has turned sluggish amid an acute farm income distress.

· Political uncertainty in an election year has affected income and job growth outlook, forcing consumers to defer purchases.

· A major shift in emission standards due next year, which will make India skip stage-V to leap directly into more stringent stage-VI from stage-IV, is making car buyers wait and watch as auto firms announce withdrawal of certain models and buyers expect major discounts ahead to exhaust existing inventory. Most auto firms have already slowed down production.

· Few car models in lower price range saw 10-15 per cent price hike in April because of implementation of new safety norms such as compulsory anti-lock braking system (ABS) and driver-side airbag.

Industry sources say inventory levels at auto firms now stand at around 45 days’ output.

The industry is going through a rough patch after a decade-long purple patch, says Sameer Kalra, Founder of Target Investing. Remember, ” BSE Auto index had jumped 81 per cent between January 2011 and January 2018.

Easy availability of funds, rising incomes and better purchasing power of consumers ensured a dream run for Indian auto mart for the whole of last decade after some major headwinds in 2010.

Some analysts say the main problem is with lending. “We need more rapid economic growth and better financing by banks,” says Shyam Shekhar, Founder of Chennai-based investment advisory firm iThought.

Earlier, NBFCs funds boosted auto sales, but these shadow banks have been going through a major liquidity crisis for many months now. “They need to be replaced by banks. It may take a few quarters to settle,” Shekhar said.

Kalra of Target Investing says much of car demand over the past few years was driven by app-based cab hailing companies.

“Ola and Uber added about 30,000 to 40,000 vehicles annually in last two years. These purchases are down to about 2,000 to 3,000 this year. B2B requirement is going down,” he said.

Apprehension of farm distress due to below-average monsoon expectations is also weakening demand. This is what led SIAM (Society of Indian Automobile Manufacturers) to project a conservative single-digit growth in FY20.

Meanwhile, replacement demand has been very weak, particularly in urban areas, as car buyers wait for more environment-friendly vehicles.

Many people are waiting for clarity on electric vehicles as they are being talked of as the future. Most auto companies are ready with EV prototypes and a more elaborated EV policy can help speed up rollouts and aid industry growth, analysts say.

“Electrical vehicles will be accepted faster than the anticipation, as they are the future of the auto industry. It may take some time to actually roll out the policy, but it will not be delayed much as the industry will need a change,” said Shekhar of iThought.

Does it mean auto stocks will remain a no-no in the near term?

Most analysts are cautious and say investors should stay away from auto stocks.

There will be a slow and steady growth for the auto sector post elections and after clarity emerges on monsoon outcome, says Gaurang Shah of Geojit Financial Services. “The migration from BS IV to BS VI standards will remain an overhang for the sector in short to medium term.”

But Shah is bullish on Maruti Suzuki, M&M and Tata Motors on a long-term basis.

Kalra has a ‘sell’ rating on Maruti Suzuki. “Throughout the industry, there is a big slowdown,” he said.

Shekhar says the market contraction could lead to negative growth and thus the stocks need to be repriced. “Maruti Suzuki is still very much overvalued. M&M may suffer due to ordinary monsoon. Tata Motors has structural problems, but it needs a couple of very successful models. These problems are not going away anytime soon,” he said.
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