A mile-long pile up

Sure, ₹1 in today’s times won’t buy you a decent meal, but it will fetch you a car for sure! Volkswagen is offering the Vento Sedan for just ₹1. Not just that: you can buy the Skoda Rapid sedan and get a Fabia hatchback free; swipe your credit card for easy EMIs and drive out with a Tata Nano; buy a Tata Manza and you are assured of 60% buyback value after three years.

The industry is heading for its worst-ever slowdown in a decade. SIAM, the apex body of automakers, doesn’t expect it to grow at even 1% and sees growth dipping as the current fiscal pulls to a close. Manufacturers are pulling out every trick to woo customers. Only, they are not obliging. A slowing economy, rising diesel and petrol prices and sticky interest rates have kept away new car buyers. To top it all, this year’s Budget announced an increase in the tax on SUVs and after Maruti Suzuki’s Gurgaon horror, wage talks have resulted in stirs at Hero MotoCorp and Mahindra & Mahindra.

Auto sales are already down 2% in the first 10 months of FY13 and as a result, share prices have taken a knock. While Ashok Leyland dropped down by 15% from January 1 to March 5 and Hero MotoCorp fell 13%, Bajaj Auto, Mahindra & Mahindra, Maruti Suzuki and Tata Motors fell between 8% and 5% over the same period. 

Surprisingly, the consensus on the Street is far from pessimistic. Arun Agarwal, analyst at Kotak Securities, says, “If someone is looking for a long term return, auto is the sector to be in. What is happening now is just a reflection of the slowdown in the economy and that will change once economic growth starts improving.” Concurs Mitul Shah of Karvy, who feels the sector will revive in the election year of 2014: “There is always a hidden demand, especially of passenger vehicles and 2-wheelers, during an election campaign. That will start reversing the decline.” But Akshay Saxena of Credit Suisse feels the discount strategy will not click for the players. “Discounts have already started hurting these companies. Even if they do increase sales volume, it will be a one-time pop,” he says.

Saxena is clearly in a minority and bullish analysts are busy issuing ‘buy’ ratings. Kotak prefers Hero MotoCorp since it trades at 11.5 times 12-month forward earnings against Bajaj Auto, which trades at 13.5 times. Reuters data shows 36 analysts are bullish on Maruti against a single ‘sell’ on the stock, while 37 analysts are bullish on Tata Motors against three with a ‘sell’ rating.

Whatever analysts might opine, buying a car would be still be a better bet than buying a stock, given that the course correction seems far from over.