Jun 3, 2016

Monsoon cheer, 7th Pay Commission payout to drive auto sector; Maruti Suzuki, Tata Motors among 7 stocks to bet on

The financial year 2017 looks promising for domestic auto industry as the strong momentum in the sales, which started in April 2016 continued in the month of May 2016 as well, with all the segments except passenger vehicles reporting a double-digit growth during the month.
Global rating agency Fitch said that prospects of a better monsoon, new product launches and salary hike to government employees as per the Seventh Pay Commission will also provide a one-time demand boost to all automobile segments in the country.

Since the beginning of the ongoing financial year, the BSE Auto index surged 8.27 per cent to 19,363.25 on May 31 from 17,883.68 on April 1. Auto majors such as Tata Motors, Maruti Suzuki, Mahindra and Mahindra and Bajaj Auto also soared 20.72 per cent, 11.94 per cent, 10.90 per cent and 8.35 per cent, respectively.

The commercial vehicle segment continued a double-digit growth (grew 14 per cent during the month). The medium and heavy commercial vehicle (M&HCV) segment (on the back of an improved economic growth and pickup in infrastructure and mining activities) and the light commercial vehicle segment (due to a sustained M&HCV demand over the last seven to eight quarters and low base of LCV in the corresponding month last year) both reported a double-digit growth in the volumes.

With expectations of better monsoon rains in 2016-17 and new model launches intensifying competition in the passenger and two-wheeler segments Fitch believes replacement demand will increase supporting commercial vehicle demand. “In addition, a 23.5 per cent salary hike for government employees, effective in 2016, will provide a one-time demand boost to all automobile segments.” Fitch said in its report.

According to Sharekhan, improved rural sentiment (on the back of a good monsoon forecast after a gap of two years) and low base of the corresponding month last year led to a strong 10 per cent and 18 per cent growth in the two-wheeler and the tractor segment, respectively. The passenger vehicle (PV) segment was the only laggard which reported a growth of 6 per cent in May. Extension of a ban on larger diesel vehicles in the Kerala region and continuing ban in the NCR coupled with the downtrend in the diesel segment dragged the industry growth to mid single digits. Sharekhan is bullish on Maruti Suzuki and Mahindra & Mahindra.

Honda Motorcycles, Scooters India and TVS Motor Company reported double-digit yoy growth in sales led by higher scooter sales. Hero MotoCorp hit its new 52-week high of Rs 3207.90 on June 3.

Post May sales figures, Motilal Oswal maintained buy rating on Maruti Suzuki, Tata Motors, Ashok Leyland, Eicher Motors, Hero MotoCorp and TVS Motor with target price of Rs 4,525, Rs 524, Rs 124, Rs 20,376 , Rs 3325 and Rs 339, respectively.

SOURCE - financial express.