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Why you should not buy auto stocks now — ICICI Direct explains

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The slowing economic activity, rising cost due to changes in regulatory norms, muted rural income, rise in inventories among others, have together impacted the sales of automobile companies across segments.

Why you should not buy auto stocks now — ICICI Direct explains
The domestic automobile sector has been going through a bumpy ride in 2019, facing a severe challenge of double-digit volume decline across segments.
The slowing economic activity, rising cost due to changes in regulatory norms, muted rural income and rise in inventories have impacted the sales of automobile companies across segments.
The stress in the sector can also be reflected in the shares of automakers with Nifty Auto index declining over 10 percent in 2019.
“With impending price hikes (>10 percent in 2-W & CV) due to BS-VI transition as well as slowing economic activity, volume growth is expected to be muted even in FY21E. This will limit the earnings growth of sectoral companies with time-based correction in stock price persisting,” ICICI Direct said.
The brokerage does not ‘blanket BUY’ on auto space.
However, ICICI Direct believes auto-ancillary players in segments like battery and tyres are better placed than OEMs due to steady-state replacement demand (~60-70 percent of sales).
“Wining combination can also be a PV exposed auto ancillary player as the category is predominantly petrol fuelled (~70 percent) and is largely insulated from steep price hike due to BS-VI transition. PV space is also structurally well placed given limited penetration as well as rising per capita income,” ICICI Direct said.
The sector witnessed a healthy growth of 8.6 percent CAGR over FY16-19. However, FY19-21E is expected to witness a de-growth of 3.4 percent CAGR.
According to the brokerage, industry volumes are expected to decline by 10.5 percent in FY20E and offer a modest recovery of 4 percent in FY21E, thereby keeping earnings as well as valuation multiples under check.
Meanwhile, the government is set to announce the scrappage policy for the auto industry soon that has the potential to achieve twin benefits of volume support to the domestic automobile industry and addressing vehicular pollution.
ICICI Direct estimates that nearly 2 crore vehicles (age>15 years) are eligible for scrappage, of which conservatively around 30 percent (60 Lakh) could translate into fresh demand for the domestic auto industry.
In value terms, this represents an opportunity of around Rs 1.2 lakh crore. It will be a big boost for the CV industry with volumes coming in for replacement equivalent to 36 percent of annual sales (FY19), it said.
“Effective scrappage policy has the potential to support the growth of the domestic automobile sector over the next three years (FY20-22). This is the desired policy support by the government for the expedite recovery of the domestic automobile sector,” ICICI Direct said.
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