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Why is D-Street hungry for auto stocks amid painful Covid wave?

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Consumer discretionaries, to which auto belongs, is one of the key sectoral picks for foreign brokerage Morgan Stanley along with industrials, financials and utilities.
What is it about auto stocks that they continue to draw investors by the hordes even when dark clouds loom over the demand environment?

On Tuesday, when the 30-share Sensex pack climbed 612 points, or 1.24 per cent, to close at 50,193, auto stocks were among the key gainers. The BSE Auto index rose 3.19 per cent. In the Nifty50 pack, four of the five top gainers were from the auto space – M&M,

, and .

Turns out, Tata Motors flattered to deceive. The stock had gone up on Tuesday on expectations of solid March quarter earnings, but the company reported a shock loss of Rs 7,600 crore post market hours.

“We had expected consolidated net profit of Rs 5,000 crore plus. The loss is primarily because of something exceptional,” said Mitul Shah of Reliance Securities.

So, why are auto stocks in demand in the middle of a Covid second wave, which has clearly dried up demand for cars and two-wheelers?

Investors and brokerages have since turned cautious over the demand situation, but continue to have bullish views on the sector from a long-term perspective. That has to do with last year’s experience, when pent-up demand came back roaring after the lockdown and sales soared across auto segments.

“I would not be surprised if we saw an auto rally from here,” says Ajay Bagga, a Dalal Street veteran. “The sector has underperformed a lot. There will be horrible numbers for May and probably most of June. We do not see a strong reopening happening at least till mid-June, if not end June. So we will have pretty bad numbers from autos, but that will compress demand and then it will come back like last year,” he felt.

Nifty Auto chartsETMarkets.com

Consumer discretionaries, to which auto belongs, is one of the key sectoral picks for foreign brokerage Morgan Stanley along with industrials, financials and utilities.

It finds valuations of consumer discretionary stocks attractive. “With real interest rates likely to remain negative through 2021, the growth is likely to be strong in the coming months. Long-term fundamentals are robust underpinned by rising incomes,” it said.

But there is key difference between last year and this year: inflation has come in. Secondly, rural India — the biggest market for two-wheelers — has been ravaged by the Covid second wave and, thus, a quick rebound in demand is not guaranteed.

Yet, the best thing is smart auto firms have already raised prices. “Those who can take the hikes, have done it. That is why the market is rewarding them. I think many will be forced to take more hikes given the kind of increases we have seen in raw material prices,” Bagga said.

Deepak Shenoy of Capital Mind does not see much hope for the sector in the next three to six months, though he admits that most of the negatives have been priced in and a few stocks are already below their 2017 prices.

“The 3-5-year story will still belong to the autos, where you will have to probably play it through both vehicle manufacturers and also through some of the ancillaries, which provide inputs to electric cars. They will script the larger growth stories in the longer term,” he said.

A lot of consolidation happened in the sector in terms of demand over the past two-three years; prices have gone up for multiple reasons such as BS-VI, increase in insurance costs as well as raw material prices. Costs of vehicles have gone up and that is hurting demand. The positive, if any, is the lower interest rate.

Deven R Choksey, MD, KR Choksey Investment Managers, says automobiles are currently not in favour, but maybe with expected good monsoon and demand recovery, and as the economy improves with more vaccination down the road, auto and auto ancillary sector would appear a better choice in the second half. “Currently they are available at better valuations,” he pointed out.

Besides the spike in cost of metals, a key raw material for the industry, chip shortage is also haunting the industry. Yet, a lot of these bad news are already in the price. If demand picks up, operating leverage will kick in.

Nilesh Shah of Kotak AMC says one can look at two-wheelers, entry-level car segments and auto component companies which are applying for production-linked incentives (PLI) and trying to join the global supply chain. “Sectors like commercial vehicles and high-end motor vehicles are to be avoided. One has to be very selective in the auto sector,” he warns.

(What’s moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

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Source: Why is D-Street hungry for auto stocks amid painful Covid wave?

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