The sharp slowdown in economic growth is taking a toll on the automobile industry, which has seen volumes decline both on a month-on-month as well as year-on-year (y-o-y) basis. Mahindra & Mahindra and Honda Motorcycle & Scooter India stand out, as they have seen volume growth in February. A pick-up in sales during the festive season was seen as recovery by many but it's apparent that consumer sentiment is weak and macro-economic conditions will have to start improving before sales revive.
Auto sales in February contracted sharply across segments. In the passenger vehicles segment, Maruti's volumes fell nine per cent y-o-y. The fall has been worse for smaller companies. The story is no different for two-wheelers and commercial vehicles. Analysts say motorcycle sales declined 4.5 per cent in February. The deceleration is reflected in valuations as well. Daiwa Capital Markets believes the sector's valuations now look more reasonable, with an average rolling one-year-forward price/earnings ratio of 13.4 times. However, this might not necessarily mean an upturn or a re-rating is likely soon. For any re-rating to happen, volumes need to pick up.
So, what's the outlook? Over the next six months to a year, auto stocks are likely to trade closer to their five-year average, as volumes are unlikely to pick up. As the economy is only expected to revive gradually, so will the auto sector. A survey by Emkay Global across 50 dealers in various segments suggests the demand environment is poor and deteriorating. Dealers have attributed the slowdown to not just high fuel prices but a sharp slowdown in discretionary spending. Companies tracking consumer confidence say sentiment continues to be weak. Dealers of two-wheelers and passenger vehicles claim footfalls and conversions have fallen. In FY14, two-wheelers could at best grow three-five per cent, while passenger vehicles might also see single-digit growth. The outlook for commercial vehicles is the most pessimistic, as analysts say it's anybody's guess when the deceleration will stop. At the end of the first half of FY13, there was an expectation that demand would revive by the year-end. Now, it looks less likely.
Among listed stocks, analysts are positive on Tata Motors, expected to be driven by the fortunes of JLR. Other than this, in the domestic market, analysts expect volumes of utility vehicles and light commercial vehicles to continue growing, albeit at a slower pace. IDBI Capital expects the weak volume trend to continue for the sector, while Barclays says auto companies seem concerned about rising fuel prices acting as a deterrent to volume recovery.