Sectoral Report: Auto Industry

The Indian auto industry became the 4th largest in the world with sales increasing 9.5 percent year-on-year to 4.02 million units (excluding two-wheelers) in 2017. It was the 7th largest manufacturer of commercial vehicles in 2018.

Some of the recent/planned investments and developments in the automobile sector in India are as follows:

  • Ashok Leyland has planned a capital expenditure of Rs 1,000 crore (US$ 155.20 million) to launch 20-25 new models across various commercial vehicle categories in 2018-19.
  • Hyundai is planning to invest US$ 1 billion in India by 2020. SAIC Motor has also announced to invest US$ 310 million in India.
  • Mercedes Benz has increased the manufacturing capacity of its Chakan Plant to 20,000 units per year, highest for any luxury car manufacturing in India.
  • As of October 2018, Honda Motors Company is planning to set up its third factory in India for launching hybrid and electric vehicles with the cost of Rs 9,200 crore (US$ 1.31 billion), its largest investment in India so far.
  • In November 2018, Mahindra Electric Mobility opened its electric technology manufacturing hub in Bangalore with an investment of Rs 100 crore (US$ 14.25 million) which will increase its annual manufacturing capacity to 25,000 units.

Income tax cuts come as a relief to auto OEMs ahead of the festive season. Amidst a weak demand environment, cos have either taken price cuts (eg: Royal Enfield) or have increased discounts (eg: Maruti Suzuki). The lowering of tax rates will partially offset revenue/margin pressures, particularly with the impending BSVI transition. Further, as benefits of the tax cuts reflect in higher spending/investments, demand for automobiles will benefit in the medium term.

Fundamental View Point :
In our view, the earnings downgrade cycle for the auto sector is bottoming. Fiscal stimulus announced by the government along with good monsoons, a benign base, and range-bound commodity prices will be supportive of earnings from here on.

Technical View Point :

As per technical structure, the Nifty Auto index is placed at important resistance of 8046 which a 200 Days EMA (Green Line). In previous trading sessions, the Auto index moved above its 100 Days EMA of 7527(Purple Line) which was supported by volume in frontline auto stocks. Considering Index move we believe that, it will halt here and may time correction will take place at levels of 7500-8100. Once it sustains 8100 levels we are bullish till the range of 9050-9080.  

Stock From Sector :
We believe Bajaj Auto will outperform as stock is trading at a reasonable valuation of 16x FY21 EPS & 2 wheeler segment will be greatest beneficial of good monsoon & tax cuts.

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