Analysts see more gains for auto stocks as sales rev up

Implementation of the Seventh Pay Commission recommendations, One Rank, One Pension are the other triggers going ahead, analysts say

Auto stocks have outperformed markets after the presentation of the Union Budget in February, when overall market sentiment started to improve. Since then, the Nifty Auto index has risen 16.5 per cent compared to 11 per cent rally in Nifty50 index.

The rise comes on the back of an improvement in market sentiment coupled with a rate cut by the Reserve Bank of India (RBI) in April, which augurs well for auto sales. Prediction of a normal monsoon in India by domestic and foreign agencies have bolstered hopes of a pick-up in tractor and auto sales.

Implementation of the Seventh Pay Commission recommendations, One Rank, One Pension (OROP) are the other triggers going ahead, analysts say.

Siddharth Vora, an analyst tracking the sector with Religare Institutional Research, says since four-wheeler stocks have done well in the past few months, it is the two-wheeler segment that was a weak link and is now poised for recovery this year. He has a 'buy' on Hero MotoCorp.

“We also have concerns regarding production capacity of select four-wheelers like Hyundai and Maruti Suzuki, which are among the biggest in terms of size. For Maruti, we are also worried about the movement in yen. On the other hand, surge in tractor sales is a positive sign, but a lot will depend on how the progress of monsoons,” Vora says.

While the going has been good for these stocks over the past few months, analysts expect the trend to continue. Some even expect gains of as much as 20 to 25 per cent from hereon.

“Auto sector stocks should outperform the markets. We like Mahindra & Mahindra (M&M), Bajaj Auto and Hero MotoCorp. That apart, we also like select auto ancillary stocks like Shivam Auto, Gabriel and Motherson Sumi. One can expect a minimum 20–25 per cent return in these stocks over a year,” says A K Prabhakar, head of research, IDBI Capital.

But, there are others like Nomura that prefer passenger vehicles over two-wheelers. It expects passenger vehicles volumes to grow 13 per cent in FY17, while pegging growth for two-wheelers at 10 per cent. Maruti Suzuki is their top pick in the segment.

However, there are headwinds as well. Last week, the Supreme Court extended the ban on registration of diesel vehicles with engine capacity of 2,000 cc and above in the National Capital Region till further orders. According to reports, the decision will have an adverse impact on companies such as Toyota, Mercedes, Jaguar Land Rover and Tata Motors. Needless to say, if economic growth slows or if monsoons are weaker than anticipated, the uptrend could reverse.