Auto and auto-ancillary companies had shut down for 10 days in Pune last month. The industry association is projecting no growth. And yet neither analysts nor the media are reporting anything negative. Many of the stocks are at their 52-week highs. What is the truth?
There has been something unusual going on in the last few weeks in the automotive and auto ancillary sectors. One of our sources in Pune tells us that automobile and auto ancillary companies in the city were shut down for 10 days in December. The closure was not scheduled. The reason is lack of demand, forcing most of the units in this auto belt to reluctantly shut down.
When we tweeted about this, to get more information, Pranay said that even Tata Motors in Jamshedpur was shut down for 10 days in late December.
And yet, automotive and auto-related stocks have been hitting 52-week highs of late in the Indian stock markets. For instance, companies like Tata Motors, Mahindra &Mahindra, Amara Raja Batteries, Bajaj Auto, Balkrishna Industries, Fiem Industries, MRF, Maruti Suzuki India, Minda Industries, Motherson Sumi Systems, Premier, Sundaram-Clayton, Swaraj Engines, to name a few, have all hit their 52-week highs of late. What is really going on?
According to Pune-based Pratik Singh lower sales forced him to temporarily close his auto ancillary factory. Higher inventories are expected to hit auto companies as demand and sales were reportedly poor (though the real scenario will be felt when quarterly results come out). It is believed that some small & medium automotive enterprises are also giving employees time off to curtail production and cut cost, according to Sachin Dixit. And yet, there is hardly any information in the media about the auto industry’s troubles.
Passenger car sales in the country declined by 12.5% in December 2012, the steepest fall in the last four months—due to high interest rates, rising fuel prices and overall slowdown in economic growth. All these would have been factored into share prices of automotive companies in general. Yet the market has shrugged off the news. Does that mean 2013 is going to be better? Not really, if the SIAM prognosis is anything to go by.
The auto industry body The Society of Indian Automobile Manufacturers (SIAM), has come up with a negative prognosis of the automobile sector stating that it will grow only by 0%-1%. It revised car sales projection for the fourth time in the current fiscal, forecasting no growth—down from the first ambitious estimation of up to 12%. This is a drastic downgrade. Furthermore, SIAM also said that the auto industry will miss its ambitious target of clocking an annual turnover of $145 billion by 2016 under the Automotive Mission Plan (AMP). “AMP target of annual turnover of $145 billion by 2016 is expected to be missed by $34 billion,” said S Sandilya, president of SIAM. “Going by the current trends, we do not think industry will be able to recover in the fourth quarter unless the government provides support,” Shandilya further added. The downward projection reflects severe slowdown in the industry across the segments.
In the weeks preceding SIAM’s announcement, several brokerages and financial institutions were gung-ho about the automotive sector doing well in 2013. Varun Goel, from Karvy Private Wealth, who spoke to CNBC, had said, “We also expect automobile sales to considerably revive this year.” Of course, Goldman Sachs, the one institution everyone looks up to, upgraded its outlook for the automotive sector to ‘overweight’, and has given positive opinions on Bajaj Auto and Tata Motors. India Infoline has listed Bajaj Auto and Exide Industries are one of the “Deadly Dozen” stocks to watch out for in 2013, with returns between 18% and 44%. Both CLSA and Credit Suisse have upgraded Tata Motors. Espirito Santo has advised clients to load up on auto ancillaries. Is there something going on that is keeping share prices buoyant that the Indian public isn’t aware of?
While it is true that select and specific companies may do well, even in difficult times, what is witnessed is a broad-based upward movement with many automotive companies touching their 52-week highs without any clear reasons to explain why, especially since a wealth of information just under the surface suggests that the industry is due for a difficult time. This has left many puzzled.