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The ‘chips’ may be down, but fund managers are seeing value in auto stocks

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Analysts tracking the sector say the shift to electric vehicles and the recently announced Rs 26,000 crore PLI scheme for vehicle and component makers are the triggers driving interest at this point. Besides, the sector had been languishing for quite some time, which has also made room for value buying auto stocks.

The ‘chips’ may be down, but fund managers are seeing value in auto stocks

“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes” – Warren Buffet

 
The automobile sector has been making headlines for all the wrong reasons over the last couple of months, but that has not stopped money managers from nibbling at them of late.
In the past one month, the Nifty Auto has risen nearly 6 percent, compared to a 2 percent uptick in the 50-stock index.
Analysts tracking the sector say the shift to electric vehicles and the recently announced Rs 26,000 crore Production-linked Incentive (PLI) scheme for vehicle and component makers are the triggers driving interest at this point.
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Besides, the sector had been languishing for quite some time, which has also made room for value buying auto stocks, some market experts said.
“Our exposure to auto is high double-digit, we have a long term view on the sector,” said Kanika Agarrwal, Co-founder of Upside AI.
The Nifty Auto has risen over 15 percent in 2021, compared to a 27 percent rise in Nifty50. The second wave of the pandemic, high raw material prices, chip-shortage and supply chain bottlenecks, all have affected sales.
Typically, auto sales—particularly those of passenger vehicles and two-wheelers—surge during the festive season. But supply chain issues weighed on Ganesh Chaturthi sales, and analysts feel the situation is unlikely to get better by Diwali.
Auto wholesale dispatches for September 2021 were a mixed bag.
The key highlight though was double-digit month-on-month uptick in volumes in two-wheeler and three-wheeler segment, gradual uptick or higher single-digit month-on-month growth in the commercial vehicle space while the passenger vehicle category underperformed sharply largely because of global chip shortages, ICICI Securities said.
“The semiconductor issue started in the second half of 2020 when chip production facilities were shut down due to global lockdowns, leading to the depletion of stocks. Later, the China-US trade war and the Taiwan drought added to the woes,” said Awanish Chandra, Head – Institutional Equities, SMIFS.
“Simultaneously, chipmakers saw a spurt in demand due to massive requirement of electronic items in response to online learning and remote working during the pandemic. The final nail in the coffin, however, was the pent up demand in the auto sector which exacerbated the component supply issue. At the start of the pandemic, car manufacturers incorrectly predicted that sales would drop and cancelled chip orders leading to pent-up demand,” added Chandra.
Although, the corporate commentary indicated that recovery is on the mend, some automakers like Tata Motors cautioned about the supply shortage resulting in the moderation of production and offtake volumes.
Carmaker Maruti Suzuki India’s sales tanked 46 percent in September due to the global semiconductor shortage issue.
“In September, the production was almost 55 percent down. This month, we have also informed the stock exchange that we will probably be down 40 percent in terms of production,” Shashank Srivastava, ED-Marketing and Sales at Maruti Suzuki, had said in an interview with CNBC-TV18.
Even as Mahindra & Mahindra reported better-than-expected tractor sales, the tractor maker warned that the challenges around the supply of semiconductors continue to pose difficulties for the auto industry globally.
However, a major section of the market believes that the negatives have largely been priced in, which implies there might be little-to-no room for a major downside in automobile stocks.
“Most definitely the semiconductor shortage seems to have been discounted by the markets already. Also, the simultaneous increase in steel prices, a major raw material cost of the auto sector comprising 35-45% of the production cost which is likely to hit the earnings immensely, too has been discounted in the sector” said Koushik Mohan, fund manager at Moat PMS.
The semiconductor shortage is expected to persist in the second half of FY22, triggering potential earnings downgrades in FY22 estimates, analysts had cautioned.
Though what one should also look out for is how the companies tackle the semiconductor issue, with minimal or without damage to their business operations, pointed out a few market veterans.
Mohan expects the sector to experience very high demand given the government’s thrust on Electric Vehicle (EV) segment through its PLI scheme, leading to a 5-6 percent cut in production cost of EVs.
“What most investors are blind to right now, are the disruptions that are bound to happen in the auto sector or more correctly auto tech…no one can actually imagine what auto tech could do in the next 7-10 years. So we remain quite bullish on the sector in the long-run,” Mohan said.
Shashank Kanodia, analyst at ICICIdirect has a similar view. He prefers companies that are readily adopting electrification and remains cautious towards slow adopters.
“We have a mixed view on auto stocks, as apart from the ship shortage, change in technology landscape (electrification) is a bigger key monitorable,” said Kanodia.
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