Why auto stocks are racing ahead at a time when sales volumes are in reverse gear

Hero MotoCorp saw a sequential increase in sales volumes from April 2019 when it sold 5.74 lakh units.

Despite decelerating sales volumes reported by most auto companies, their shares have been trading higher. Down more than 23% in the last one year, the Nifty Auto index rose 1.9% on Monday, making it the biggest gainers among NSE’s sectoral indices.

A bulk of the index is being lifted by two-wheeler stocks. Most of these two-wheeler stocks had lost significantly over the latter half of last year. Shares of the three listed two-wheeler companies rose between 3.6% to 5.8% on the NSE.

TVS Motor Company Ltd registered sales of 3.07 lakh units in May 2019 as against 3.09 lakh units in May 2018. Hero Motocorp Ltd reported sales of 6.52 lakh units of motorcycles and scooters in May 2019, down from 7.06 lakh in May 2018. Bajaj Auto seemed to have bucked the trend showing an increase of 3% in sales volumes to 4.19 lakh units in May 2019 over the same period last year. Still, a low single-digit growth is nothing to get excited about.

What then explains the excitement? The reason probably why these shares are once again coming back into focus is because of the improving month-on-month volumes, according to analysts. For instance, Hero MotoCorp saw a sequential increase in sales volumes from April 2019 when it sold 5.74 lakh units. This seems to suggest that the auto sector may be slowly moving on to the higher gears.

Investors are also pinning their hopes on the upcoming monetary policy, and the buzz is that interest rates are expected to be cut by around 25 basis points at least. Analysts see this as spurring further auto sales and boosting sentiments in the credit market. Investors are also expecting sops to revive the auto sector.

“There is a hope that the new government will provide some stimulus either through incentives or a lower Goods and Services Tax,” said Jigar Shah, managing director, MayBank Kim Eng Securities Private Ltd. “The market is also banking on the cut in interest rates to spur demand.”

Heavily dependent on the finance sector, most passenger vehicles are still showing sluggish growth. For instance, Maruti Suzuki Ltd saw its sales volumes decline nearly 22% in May over the same period last year.

While Mahindra and Mahindra Ltd was not hit too much by the slowdown, its volumes still dipped 3% in May 2019. Ashok Leyland Ltd’s too faced a similar decline of 3.6% in May 2019 over the same period last year.

Analysts also reckon that much of the slowdown is now factored in the stock prices. As the auto sector underperformed the broader market, analysts say that some auto stocks are at low valuations. But still the sector is not out of the woods yet, and investors may well consider how the volume growth sustains over the coming months. And last but not the least, the fact that the liquidity crisis is still taking its toll on the sector cannot be ignored.