In 2021 so far, the Nifty Auto index has risen merely 6 per cent as against 18 per cent gains for the benchmark Nifty50 index. Automobile stocks are among the biggest underperformers in the Nifty50 index this year.
While concerns surrounding the sector are reasonable, recent signs suggest there can be a cause for optimism for the space.
Brokerage firm Jefferies India suggested that a sharp rise in wages for information technology workers as well as lack of a meaningful impact of the pandemic on formal sector employment in 2020-21 have set the stage for consumer discretionary demand to return.
“Faster job growth and salary hikes could help in urban sentiment recovery. We see this as a positive for urban consumption such as PVs, high-end 2Ws, restaurants and the property sector,” Jefferies India said in a recent note.
A reflection of Jefferies India’s optimism on demand for high-end automobiles is the addition of
in its model portfolio with a 200 basis points weight.
At the end of the first wave, demand for automobiles picked up in a meaningful way during the festive period aided by a strong rural market and steady recovery in urban markets. Preference for private means of transportation to avoid crowded public transport in pandemic times also spurred demand for cars.
That recovery process was stopped in its tracks by the second wave of the pandemic, and while demand did pick up in July, it remains lethargic. However, companies such as Eicher Motors and
cited the prevalence of strong demand for products in the market even as they suffered from production-related issues to supply the market.
“We have seen a pickup in enquiries as well as bookings, as also in daily retail. That is the extent of recovery, and we believe this time the recovery is led by both urban as well as rural unlike last year which was mainly led by rural,” Shashank Srivastava, senior executive director at
Suzuki India, told investors in a post Q1 earnings call.
As for rural India, analysts are hopeful that a normal monsoon will help recovery of rural incomes that were hit by the second wave of the pandemic, and will prove to be a catalyst for demand for two-wheelers, in particular.
“What makes us optimistic on the space is the sustenance of recovery beyond pentup demand, which is aided by a slew of new product launches and improving macro outlook,” brokerage firm Indsec Securities and Finance said in its initiation note two-wheelers last week.
That said, the two-wheeler space, in particular, is vulnerable to disruption from electric scooters and motorcycles in the wake of Ola Electric’s new e-scooter. However, Indsec Securities is of the view that a meaningful shift towards electric vehicles will happen in a phased manner and Ola’s capacity expansion will not have any sudden disruption on the internal combustion engine-based two-wheelers.
Whether investors will look past the near-term headwinds on margins and production in the sector to focus on long-term demand prospects remains to be seen, for now some analysts believe automobile stocks may prove to be a dark horse for the remainder of the year.
