With most headwinds having eased, the pace has picked up for automakers. Barring Bajaj Auto Ltd and Hero MotoCorp Ltd, automakers’ sales volumes in most months of FY23 (till February) have been ahead of the levels seen in 2019 (pre-Covid). Pent-up demand, especially in the passenger vehicle segment, is a factor that has driven the volume growth. Besides, softening cost of commodities like steel and aluminum is giving a much-needed boost to the margins of automakers.
Against this backdrop, most auto companies saw sequential and year-on-year (YoY) growth in gross margin in the December quarter (Q3FY23). The auto sector has seen a big earnings upgrade. In a report at Motilal Oswal Financial Services, analysts said, “In the third quarter of FY20, Nifty Auto earnings saw a 26% rise in earnings for FY2023, one of the biggest upgrades in the last five years.” is (except for opening after a quarter).” On 2 March “Auto sector contribution to Nifty 50 earnings is expected to improve to 6% by FY25E (same as FY19) from a low of 1.3% in FY22, but from around 10% contribution seen during FY14-18 is also less. “, he added. Amid this scenario, the Nifty Auto index is up 30% in the last one year, compared to a 9% rise in the Nifty 50 index. For now, it appears that investors in auto stocks are basing on most of the positives. are considering.
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Yet, how the rural recovery unfolds remains to be seen given a new risk – the possibility of 2023 being an El Niño year. El Nino creates a hot summer and a weak monsoon. Mitul Shah, head of research at Reliance Securities, said, “An El Nino and unfavorable monsoon scenario could worsen the performance of the automobile industry.”
This will be disappointing for auto companies which are more inclined towards the rural economy. For example, take the tractor segment. True, the vertical is now in a strong position. Mahindra & Mahindra Ltd (M&M) and Escorts Kubota Ltd’s tractor volumes grew by 10-15% year-on-year in FY23 (till February). In fact, overall tractor volumes are expected to touch a record high this fiscal. However, if the risk of El Nino persists, there could be an adverse impact on the rural economy, which in turn will lead to a drop in earnings for tractor manufacturers.
To be sure, historical data suggests that El Nino years have had a mixed impact on tractor sales when there was deficient monsoon, according to an analysis by Kotak Institutional Equities. Domestic tractor sales have fallen in FY03, FY15 and FY16 in cases of deficient monsoon during El Nino years. On the other hand, the volumes had increased during FY05 and FY10. What did you give? Apart from a normal monsoon, other factors are also working to increase tractor volumes. One such factor is the use of tractors for non-agricultural purposes. For example, FY2010 saw a 32% increase in tractor sales, despite a 23% deficient monsoon, mainly due to factors such as higher minimum support prices, stable rabi crop production, and focus on credit disbursement to the farm sector Kotak said.
In this way, budget announcements in favor of rural and agriculture sector will support rural reform.
Nevertheless, El Niño is an emerging risk and needs to be tracked closely. Apart from tractors, entry-level two-wheelers and passenger vehicles, where demand is yet to pick up, could also be impacted. In such a situation, more clarity on the condition of El Nino is expected to emerge in April.
All that said, investor sentiment towards auto stocks has improved, but incremental adverse factors could turn sour.
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