In the auto sector, the demand is low, inventory is high and commodity prices are eating into margins. Why have none of the auto stocks crashed?
There has been a correction in auto stocks but not so significant. The reason for that is many people believe that it will be a repeat of what happened last year. But in my view that is not going to happen.
Last year, the number of Covid cases was less, inflation was very low and input prices were very low. As the economy opened up, pent-up demand came back. This time high value items like autos, large size consumer durables, etc will get severely impacted even after the economy starts getting opened up because inflationary pressures are high.
Today someone told me that they booked a car in March and even before the delivery the price has been hiked three times. So there is price hike, inflation, people getting impacted, real incomes suffering, people spending on Covid and on top of that there is going to be no additional stimulus this year. So everything is going to be muted. Auto remains a space where people need to be very careful. In my view it will be an underperforming sector.
On Tata Motors
The story in global plays is different if their exports do well. But Tata Motors will get impacted by input price hikes because it is not easy to pass on price hikes in global markets. So I think there could be some impact but it will be less impacted than pure domestic plays.
What is your take on consumer durable plays? The latest indication is that the demand will start faltering quite significantly and the sales of ACs, TVs and refrigerators have already fallen nearly 65%.
Right now the demand has fallen because outlets are shut. I don’t think that we will see a demand recovery similar to last year’s because inflation has gone up substantially. The valuations are still high because most analysts are expecting a very rapid recovery post lockdown. That does not seem likely.
Do you think SBI, PNB, ICICI Bank and Axis Bank will continue to outperform?
I am not sure about SBI which has a very huge MSME book. MSMEs will get impacted significantly this year and there is no system wide moratorium. Banks will need to recognise NPAs. SBI also went aggressive on expansion of retail loans in the last couple of years.
That could impact them but the fact of the matter is that markets are so complacent that the largest retail lending NBFCs Bajaj Finance (7:26) that stock is trading almost at all time highs because there is somehow I believe that they will be able to handle the retail NPA spike which is going to come which I think is very tough because this time it will be a tough thing so I think
All financials will get impacted. Some of them like ICICI Bank may get less impacted. In SBI, the advantage is that there is a lot of value in its subsidiaries in insurance, general insurance, asset management etc which gives it a downside protection.
