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Auto Industry Witnesses Signs Of Stability Across Segments

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Auto Industry Witnesses Signs Of Stability Across Segments
Himali Patel - 23 December 2019

Mumbai, December 23: Auto industry has slowed down in the last one year due to few negative factors like new insurance policy resulting into higher cost for end consumers, Non-Banking Financial Companies (NBFCs) issue and liquidity crisis, higher monsoon deficit in few regions impacting rural demand, new axle load norm and overall economic slowdown. However, after enduring tough 12 months, the auto industry is seeing signs of stability across segments, said Motilal Oswal Institutional Equities in one of its sector update report. As per the sector update, the industry is partly driven by high discounts, improvement in availability of finance and rural sentiment improvement. Motilal Oswal noted that there are three major themes that would be seen in year 2020.

Firstly, as per the research, although the worst seems to be over, there is not any easy secular recovery considering last hurdle, that is Bharat Stage 6 (BS-6) transition that is expected from April 2020. “After operating in a tough environment over the last 15 months, the auto industry now faces the last hurdle of BS6 transition, post which it will likely be ‘business as usual’ from 2HFY21, in our view. With the demand environment showing signs of stability and inventory under control, the BS6 transition is likely to be less problematic (unlike BS4),” noted an analyst at Motilal Oswal.

Secondly, the recent corporate tax cuts announced by the government, improves the long-term attractiveness of the auto sector on the back of the cyclical revival in demand aided by the disproportionate improvement in Return On Equities (ROEs) due to lower taxes. Lastly, as volumes recover for certain segments of the auto industry, this would create a sharp recovery in the margins. “Our top picks in autos are Maruti (Cyclical pressures not structural; Muted earnings makes valuations look richer), Eicher Motors (Preparing for the next leg of growth; Awaiting Industry tailwind) and Motherson Sumi (Headwinds waning, Expectations toned down),” noted the research update.

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