Although Nifty Auto index has risen 17 per cent this year so far, it has underperformed the benchmark index by considerable 10 percentage points. That underlines the fact that investors have largely shied away from the sector.
With the festive season entering its busiest period, hope is emerging among investors that the sector could stage a mini turnaround going ahead. On Monday, Nifty Auto index rose 3 per cent, led by heavyweights like Maruti Suzuki India, Tata Motors and Mahindra & Mahindra. Yet it failed to build on those gains today.
“Depressed valuations and hope of festive demand will drive this rotation towards automobile stocks in the coming weeks,” said an auto sector analyst with a city-based brokerage firm, who requested anonymity citing regulations.
The second wave of the pandemic, which was another body blow for the sector after last year’s national lockdown, has been waning as daily caseload has fallen dramatically since their May peak. Further, rising vaccination rate is easing concerns around a third wave, which is now expected to be less severe than the previous two.
Analysts suggested that demand in rural as well as in urban areas will revive during the festive period, which tends to bring in close to 25-30 per cent of automobile companies’ revenues in a normal year.
Brokerage firm Axis Securities believes there will be strong demand in the December quarter helped by rural recovery and increased need for personal mobility. “The forthcoming festive season is expected to be a key trigger for sales recovery,” the brokerage firm said.
In addition to demand revival, analysts said large automobile manufacturers are also showing signs of pricing power given the spate of price hikes already taken by them. “Not only price hikes, but discounts offered by passenger vehicle companies are also shrinking,” the analyst said.
That said, challenges for the sector are plenty. Two-wheeler companies are dealing with higher competitive intensity because of the entry of Ola Electric in the affordable scooter segment. Ola’s electric scooter is a grave threat to the market dominance of Hero MotoCorp.
Further, passenger vehicle makers such as Maruti Suzuki, Tata Motors and M&M are unable to capitalise on their strong order book due to unavailability of semiconductors. Tata Motors last month suggested that the chip shortage will improve only from October onwards, but it is not something that the company is counting on.
In that backdrop, a higher-than-expected pent-up demand will become crucial for automobile companies if their stocks continue to gain over the Dussehra and Diwali period, said analysts. They said if demand falters even in the traditional festive period, then automobile companies could be in for a long winter.