Are Automotive Sector Stocks Set to Make a U-turn? | Outlook Business
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Are automotive sector stocks set to make a u-turn?
Already grappling with falling sales in FY16, the auto sector has been further hit by measures in the Budget 

Ambrish Mishra of JM Financial and G Chokkalingam of Equinomics Research and Advisory on where auto stocks are headed

 Ambrish Mishra, director, institutional equity research, JM Financial 

Auto companies are trading in a band of 13x to 25x estimated FY18 price-to-earnings, which we believe is justified given the earnings growth momentum of most companies. We expect the industry earnings to grow at 15-20% annually over the next two years on the back of strong volume growth, benign input prices, operating leverage and superior sales mix. Over the next few months, we could see a positive impact on volumes as a result of recovery in rural demand and implementation of the 7th Pay Commission. Lower fuel prices and declining interest rates will also be positive for demand. The Street has been unnerved by the recent budgetary measures on the auto industry, but I don’t see a reason for worry. The luxury tax (1%) and infra cess (1-4%) are not major hurdles given the quantum and categories to which they apply. We believe domestic auto demand holds strong growth prospects and will be steered by vast under-penetration, rapid urbanisation and growing per capita income.

G Chokkalingam, founder, Equinomics Research & Advisory

Auto sales across segments have been impacted by the single-digit growth syndrome. In the 11 months of FY16, passenger vehicle sales grew 8% y-o-y, commercial vehicle 9% and two-wheeler by a mere 1.4%, while three-wheeler sales declined 3% y-o-y. The headwind is expected to be tougher thanks to the infra cess on cars and luxury tax on vehicles worth over 10 lakh. Auto exports, too, have grown at a mere 1.6% y-o-y during this period. In fact, pressure on margins in China and the US will further impact growth opportunities for players operating in these economies. Increasing competition, especially in the two-wheeler space, and the recovery in the prices of metals will exert cost pressure on auto companies. A failed monsoon for the third year in succession could deal a killer blow to both the economy and the auto sector. Against such a backdrop, auto stocks, which are trading at 25x to 50x estimated FY16 earnings, could see significant contraction in multiples, going forward.

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