March auto sales may be mixed amid high inventory, but these 2 stocks remain brokerages top picks

Passenger vehicles and two-wheeler sales are expected to be a mixed bag while the commercial vehicle segment is expected to register weak growth during March.

Automobile sales in March are expected to be mixed for the sixth consecutive month, citing high inventories, rising ownership cost and deferred purchases during general elections, brokerages said.

Passenger vehicles and two-wheeler sales are expected to be a mixed bag, while the commercial vehicle segment is expected to register weak growth during the month.

In a recent report, Emkay said channel checks indicate rising ownership cost, deferred purchases during elections and selective financing by non-banking financial companies (NBFCs) are constraining volume performance across the automotive segments in the near term.

In the last year, the sector has been worst performer, with the Nifty Auto index falling nearly 24 percent, amid a liquidity crisis and weak festive season. In March itself, the index was down 1.5 percent as against a seven percent rally in the Nifty.

Motherson Sumi Systems (down 10 percent), Hero MotoCorp (4 percent), Tata Motors (4 percent), Bharat Forge (3.6 percent) and Maruti Suzuki (3.4 percent) were top losers during the month.

Emkay forecasts mixed domestic volumes in March, with growth in passenger vehicles but muted showing in other segments.

Motilal Oswal to expects the same. "While demand for passenger vehicles is partially supported by new launches, the same for a commercial vehicle has been declining over the past two months due to weak demand from major end-user segments."

Passenger vehicles

Emkay said passenger vehicle volumes are expected to be positive in the domestic market, with nine and four percent growth for Mahindra & Mahindra and Tata Motors, respectively.

But Maruti Suzuki, the largest car maker, is expected to post an 11.5 percent year-on-year decline in total despatches in March due to weak demand trends in the key western, central and northern markets such as Maharashtra, Gujarat, Delhi, and Madhya Pradesh, leading to continued high inventory levels, Motilal Oswal said, adding that dealer inventory stands at 45-60 days.

Two-wheelers

Sales in the two-wheeler segment are expected to be a mixed bag, with declines in Eicher Motors and Hero MotoCorp and growth seen in Bajaj Auto.

Emkay expects Eicher Motors and Hero MotoCorp to report a 12 percent and six percent decline in sales, while Bajaj Auto will post a 16 percent growth YoY.

The research house said competitive intensity has increased as a result of free insurance schemes by Hero MotoCorp and Bajaj Auto.

Dealer inventory days have significantly increased over the past few months and have reached historically high levels. Hero MotoCorp has the highest dealer inventory days at around three months, followed by two months for Bajaj Auto and TVS Motor Company, and one month for Royal Enfield.

After the gloom in January and February, Motilal Oswal said key channel partners are indicating weak retail sales across key markets in March too.

Commercial vehicle

"Demand remains muted due to weak trends in major end-user segments in the key western, southern and northern markets. Demand for tippers (infrastructure) is slowing due to non-release of funds by state governments have given the upcoming general elections. This has resulted in high average discount per unit," Motilal Oswal said.

Emkay said medium and heavy commercial vehicle volumes are likely to be negative due to the high base of last year, surplus capacity and purchase deferrals during the election season. It expects lower domestic M&HCV volumes for Eicher Motors (down 10 percent), Tata Motors (down 6 percent) and Ashok Leyland (down 5 percent).

Tractors

According to Emkay, domestic tractor volumes are expected to be muted, with flat growth for Escorts and a four percent decline for M&M. Dealer inventory days stand at 30-40 days.

Trading strategies

Both brokerages prefer the passenger vehicle segment (four-wheeler) as it is relatively less affected by the upcoming Bharat Stage VI transition in comparison with other segments, offering a stable competitive environment.

The common stock picks among them are Motherson Sumi Systems and Exide Industries.

Emkay's top picks include M&M, Motherson Sumi, and Exide Industries. "Our top sells are Ashok Leyland, Eicher Motors and Bajaj Auto," it added.

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