Auto stocks’ recent bounce could be ‘short-lived’

MUMBAI: Stock performance of automobile companies has steadied in August after being the biggest laggards so far in 2019, but the new-found resilience could be short-lived unless the government announces measures to stem the falling demand for vehicles. Analysts said the strength in automobile shares has been mostly driven by covering of bearish bets rather than fresh investor interest, making them vulnerable to further sell-offs.

“Broadly, short positions have been unwound because of expectation of announcement for the sector. Fresh longs are still not there in the system. It is a dead cat bounce unless there is some announcement," said Rajesh Palviya, head-technical and derivatives at Axis Securities.

The BSE Auto index is up 1.75 per cent so far in August, ending at 15,742.22 on Wednesday. The index is down 37 per cent from all-time high of 24,958.96 hit in August 2018 due to the decline in auto sales in July — the sharpest in 19 years.

A revival in monsoon and expectation of a pick-up in demand during the upcoming festival season have also revived investors’ interest in two-wheelers. Analysts are most bullish on Bajaj Auto due to attractive valuation and strong product line.

Hero MotoCorp is up 15 per cent this month, while Bajaj Auto and Maruti Suzuki (India) have gained 10 per cent and 14 per cent, respectively. Tata Motors has fallen 17 per cent in August, of which most of the decline came on Wednesday when the stock slumped 9 per cent. The stock has been weak due to disappointment over JLR earnings and fear of a no-deal Brexit.

“Over the past few sessions, we have witnessed bottom-fishing in auto stocks (except CVs) as they were oversold. But the delay in announcing a package for the sector will lead to people starting to lose hope, although in all fairness we do not want a band-aid solution,” said Deepak Jasani, head of retail research at HDFC Securities. “There is also a question of how much boost the government can afford to give at this point in time within its limited resources given the slowdown in tax collections and focus rural distress,” said Jasani.

The effects of the slowdown in the economy is visible in the auto space, with regulatory changes also denting sentiments. “The sector has seen more of a cyclical slowdown. Last year urban demand was weak which was compensated by rural demand and helped overall demand grow in mid-single digits,” said Aditya Jhawar, analyst at Investec.

“This year there was issue with the onset of monsoons... The rabi crop should be reasonably good which should push rural demand. Also, the auto industry has been lobbying for government support through GST rate cut or fiscal intervention," said Jhawar.

Action in the derivatives segment has been mostly restricted to short covering. Maruti Suzuki futures open interest is down 25 per cent in August while that of Hero MotoCorp is down 11 per cent.

Jhawar of Investec is bullish on Bajaj Auto with a target price of Rs 3,130. “We like Bajaj Auto as valuations are attractive. The company has outperformed the industry last year and may again outperform this year because of strong product pipeline and rejigged strategy,” said Jhawar.