The August auto sales numbers saw a decent rise thanks to improving chip availability and a build-up in inventory ahead of the upcoming festive season.
Not only did passenger vehicles (PVs), commercial vehicle (CV) segment and two-wheelers (2Ws) segment see a rise in volume on a year-on-year (YoY) basis, even the tractor segment, which was expected to remain either flat or see a dip in volume due to uneven monsoon, saw an uptick.
As the brokerage firm Motilal Oswal Financial Services pointed out, the volume of the 2W segment rose 8% YoY. It said the domestic wholesales for original equipment manufacturers (OEMs) were above its estimate, indicating a build-up in inventory ahead of the upcoming festive season, while exports were under stress.
The PV segment rose 43% YoY with retail demand stable but remaining below the estimates of Motilal Oswal. Motilal underscored that easing semiconductor shortages have led to a decline in the waiting period for models across OEMs, though the situation remains uncertain.
The CV segment rose 16% YoY but both M&HCV (medium & heavy commercial vehicles) and LCV (light commercial vehicles) volumes were below the estimates of Motilal Oswal.
The tractor segment grew 2% YoY. The monsoons have largely remained above their LPA (long period average), but uneven rainfall in key paddy states in eastern India is impacting sowing, Motilal Oswal said.
Should you buy auto stocks?
Investors remained upbeat on the auto stocks in August as the sectoral index Nifty Auto rose 5.37% compared to a 3.50% gain in benchmark Nifty.
Some of the stocks such as Escorts and Mahindra and Mahindra jumped 15% and 12%, respectively, in August. Stocks of Eicher Motors and TVS Motor Company rose more than 8% each, outperforming their sectoral index.
Punit Patni, Equity Research Analyst, Swastika Investmart has a cautiously optimistic view of the automobile sector due to the recent gains in the stock prices.
"Even though the past challenges like the semiconductor shortage, key raw material and commodity inflation and supply chain issues are mostly behind us, the recent run-up in their stock prices has capped the further upside in the near term," said Patni.
"The export market is expected to remain subdued due to the global economic slowdown; nonetheless, the order backlog and upcoming new launches will help sustain domestic demand. Further, the upcoming festive season demand and management commentary remain positive," he added.
Patni believes due to demographical strength and very low per capita vehicle ownership in India, the sector will perform well in the long term. He is positive about Tata Motors, Ashok Leyland, Mahindra and Mahindra, and Hero MotoCorp.
The road ahead for the sector will depend on factors including the chip supply, economic activities and the performance of the monsoon which is on its last leg.
As Motilal Oswal pointed out while easing semiconductor supplies boosted PV retails, and increasing economic activity and higher capacity utilization propelled CVs, the 2W segment is yet to recover amid a high cost of ownership.
The upbeat August sales numbers may infuse fresh positive sentiment for the auto stocks. The Nifty Auto index ended in the green with a gain of 0.37% on September 1 even as the market benchmark Nifty closed 1.22% lower.
Brokerages advise buying stocks of big sectoral players amid the prevailing market condition.
"We prefer 4Ws over 2Ws on the back of strong demand and a stable competitive environment. We expect the
momentum in the CV cycle to continue. We prefer companies with: (a) higher visibility in terms of demand recovery, (b) a strong competitive positioning, (c) margin drivers, and (d) balance sheet strength," said Motilal Oswal.
Maruti Suzuki India and Ashok Leyland are its top OEM picks. Among auto component stocks, the brokerage firm prefers Bharat Forge and Apollo Tyres.
Brokerage firm Emkay Global is positive about the sector for FY23, expecting a volume growth of 26% for PVs, 20% for CVs, 14% for 2Ws, and 3% for tractors.
"We retain our constructive view on the auto sector, and our top picks are Maruti Suzuki, Tata Motors, Hero MotoCorp, Ashok Leyland, and Escorts," Emkay said.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.