Auto stocks slide amid dismal August sales; Morgan Stanley overweight on Maruti, Ashok Leyland

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Benchmark indices were down around one percent early on September 3. The Sensex was trading at 37,016 level, down over 300 points, while the Nifty slipped 96 points to trade at 10,927.

The Nifty Auto was down over 1 percent, dragged by Tata Motors which shed 2 percent followed by Eicher Motors, Bosch, Amara Raja Batteries, Mahindra & Mahindra, Maruti Suzuki, Tata Motors DVR and Ashok Leyland.

Almost all major auto companies have reported a sharp drop in sales in August as well. Cumulatively, domestic passenger vehicle sales dropped 30.9 percent year-on-year (YoY) to 1,95,558 units in August, falling for the tenth consecutive month.

The numbers are alarming and the challenges are mounting for the auto sector. At first glance, it looks logical to stay away from auto sectors, as a

continuous fall in sales has hit the stock hard.

However, some analysts see the beaten auto stocks as contrarian bets for a six-to-twelve-month horizon.

“I am positive on some auto stocks with a six-to-twelve month view because these are brands which are going through a one-year cyclical slowdown after being the biggest wealth creators for eight-ten months,” said Sanjiv Bhasin, EVP-Markets & Corporate Affairs at IIFL.

“In the case of auto companies, both structural, as well as cyclical issues, have conversed to trigger a slowdown. However, it is most unlikely that the auto sales will fall more in the near future,” said G Chokkalingam, Founder of Equinomics Research & Advisory.

August auto sales tell a sorry tale. The sector giant Maruti Suzuki India posted a YoY decline of 32.7 percent.

Similarly, Tata Motors reported a 58 percent YoY decline in domestic passenger vehicle sales at 7,316 units.

Mahindra and Mahindra saw a YoY drop of 32 percent in the passenger vehicle segment in August. Hero MotoCorp reported a YoY decline of 20 percent, while Bajaj Auto reported a YoY decline of 13 percent.

Japanese research firm Nomura said that the industry volumes were down sharply, with passenger vehicles down 33 percent YoY while M&HCVs was likely down 49% YoY In August.

The firm has maintained reduced rating on Eicher Motors and TVS Motor, while Mahindra & Mahindra gets a buy-rating stock among original equipment manufacturers (OEMs) due to attractive valuation.

According to Morgan Stanley, a cut in GST rate will have a direct impact on end-consumer prices. It kept an overweight stance on Maruti Suzuki and Ashok Leyland. Hero Moto could be a key beneficiary as it has a large BS IV inventory. Tata Motors and Bajaj Auto could lag the sector if there were a GST cut linked stock rally.


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