Falling auto sales may dent valuation premium

ET Intelligence Group: In the world’s fastest-expanding auto market, speed bumps appear to be mushrooming just about everywhere.

Product launches seem to have become less frequent, the fattest bike segment lacks the zing to add zip to sales charts, and lenders don’t appear too keen to fund a new set of wheels any more – particularly for the largely unbanked.

The result? A protracted slide in automobile stocks.


In the festive season, the BSE Auto index trailed the BSE Sensex by 7 per cent. Eicher Motors, Mahindra & Mahindra, Maruti, and Ashok Leyland have fallen 3-17 per cent in the past three months.

Moderation in sales means only 5-8 per cent growth in the projected earnings of the listed automakers for the current fiscal year. Hence, their valuation premium compared with the longterm averages could further narrow. The price-earnings multiple of the BSE Auto index, based on the next twelve months’ earnings, dropped 9 per cent to 17.4 in the past three months.

Valuation declines could be steeper at Eicher Motor and Maruti Suzuki. Earlier, the Street had considered the moderation in demand for the Royal Enfield as one-off, but declines in the past two months point to a likely stagnation in underlying demand. Eicher Motors fell 9 per cent on Wednesday after it reported lower than expected volumes — for the second consecutive month.

Eicher Motors has trimmed its production guidance to 9.25 lakh units for FY19 from 9.5 million announced earlier. Average monthly sales of Royal Enfield have been 70,000 in the past nine months of the current fiscal year. Given soft underlying demand due to higher cost of ownership and competition from the recently launched Jawa, Royal Enfield might face challenges in raising sales to 90,000-plus units in the next three months. Analysts are pencilling in volume of 8.6-8.9 lakh units for the current fiscal year, a growth of 3-8 per cent YoY. A singledigit volume growth could be the first since 2010 at Royal Enfield. The cut in volume growth to 3-8 per cent in FY19 from 15 per cent at the beginning of the year has resulted in projected EPS reduction to Rs 852 from Rs 960, a drop of 10 per cent.

Volume growth at the largest twowheeler maker Hero MotoCorp has also not been very encouraging. Volumes fell 4 per cent in December. The challenges can be gauged from the fact that Hero MotoCorp’s Chairman Pawan Munjal urged the government to bring down the GST on two-wheelers to 18 per cent from 28 per cent to revive consumer demand.

Separately, car sales growth has decelerated in the past four months. India’s largest car maker Maruti Suzuki saw its volumes increase 6.5 per cent in the first nine months of FY19, and growth since July has been either negative or in low single digits.

Given the weakness in the underlying trend, Maruti’s management lowered its growth guidance to 8 per cent from double-digits at the beginning of the year. Maruti’s consensus EPS has been cut by 12 per cent to Rs 286 per share from Rs 327 in the past three months.