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Samvat 2072: Auto sector could see faster recovery

November 11, 2015 11:44 IST

There are question-marks about export competitiveness, since global trade is in bad shape. However, domestic demand may have picked up a little.

On Diwali eve, everybody is hoping that Samvat 2072 will be better than Samvat 2071. In the last 12 months, the major indices have net negative returns.

On November 11, 2014, the Nifty closed at 8,363. A year later, it is down five per cent. After touching all-time highs at around 9,120 in March, the trend has been downhill for the last eight months. Sectoral performances have also been poor.

FMCG, Automobiles and Pharmaceutical are about the only sectors with nominally positive returns.

Note that inflation as measured by the Consumer Price Index ran at an average of about 5.6 per cent through the last 12 months.

Also, a simple one-year fixed deposit would have offered interest at over seven per cent. No sector has beaten those basic benchmarks of inflation and risk-free return.

The NSE's Automobile index has returned 1.6 per cent since November 2014, the FMCG index has returned five per cent and the Pharma Index has been the best performer with six per cent.

Pharma is largely export-oriented and perennial since there is demand for drugs, regardless of economic cycles.

The issues here centre on arcane points of international intellectual property rights.

Most pharma companies face multiple legal challenges and litigation. Several exporters have also been hit by negative reports from the US Food & Drugs Administration authority, which inspects facilities exporting to America. FMCG and Automobiles on the other hand, are largely driven by domestic markets.

FMCG is a perennial in that people eat biscuits, bathe and use toothpaste regardless of business cycles. But, there are secular upsides for FMCG in India as well.

Growing prosperity has meant lifestyle upgrades from people moving up into the middle class. Better infrastructure has helped FMCG products to be distributed more easily and cheaply to more remote rural areas.

So, the market has expanded.

On the other hand, India is very price-conscious and FMCG is highly competitive.

Also, two bad monsoons in a row have hit rural demand, affecting growth rates.

Of these three, automobile is the most cyclical sector. India has a big domestic auto market. It is also a key exporter and manufacturing hub.

Every sort of vehicle is made in India including trucks, four-wheelers, three-wheelers, two-wheelers, tractors, etc.

Many original equipment suppliers are also listed across the entire long value-chain. The auto industry had been in a slump for several years. It now appears to be pulling out.

There are question-marks about export competitiveness, since global trade is in bad shape.

However, domestic demand may have picked up a little. As always, manufacturers are hoping for a Diwali pickup. Overall, unit sales have been up now for 12 months in a row.

But it has happened in fits and starts, with one segment or another growing at any given time. Rural demand has been weak, given poor monsoons.

This meant poor tractor sales and shrinking two-wheeler sales.

Most interestingly truck sales have improved recently, which is usually a sign of an economic pickup. If fuel prices stay low, and interest rates fall (making EMIs easier to service), demand may rise across most auto segments.

A momentum investor would advocate more exposure into these three sectors on the basis that performance should improve in all three.

That may not necessarily be the way to go. FMCG and Pharma remain high valuation areas. If the economic recovery picks up steam, there is more scope for capital gains in beaten-down sectors than in perennials.

But the automobile industry could see cyclical recovery accelerating, especially if the 2016 monsoons are good. The author is a technical and equity analyst

Devangshu Datta
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