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Automobile and auto component stocks had a bumpy ride in 2018 as muted sales growth and impending regulatory changes made the sector less attractive to foreign portfolio investors as well as domestic investors.
On sectoral basis, automobile and auto components remained the second-highest loser of foreign investments, after banking, with FPIs making net sales of equities worth ₹16,500 crore between January and mid-December.
The net investment by FPIs in the automobile sector closed in the negative in nine out of 12 months, with May recording the single highest outflow of about ₹3,900 crore, followed by ₹3,500 crore in October when FPIs made a record sell-off of Indian equities and bonds worth ₹38,900 crore ($4.6 billion) pushing the market into panic mode.
“FPIs have been net sellers in India, and autos being overweight sector is bearing the brunt of the same,” said Jinesh Gandhi, Deputy Head of Research & Auto Sector Analyst — Institutional Equities, Motilal Oswal Financial Services.
He added that weakness in the auto segment exists since mid-CY18 due to higher fuel prices, increase in interest rates, increase in cost of ownership (insurance, price increases by OEMs, regulatory factors, etc) and erratic monsoon in certain pockets. These factors led to weakness in operating margin and stock performance of automobile firms, he added.
22% drop in auto index
Nifty Auto Index, which captures over 92 per cent of market capitalisation of the automobile sector, fell 22.57 per cent year-to-date, against 1.89 per cent increase in Nifty 50.
Even domestic investors were not optimistic about the automobile sector. Sector-wise deployment of funds by mutual fund houses shows 13.48 per cent decline. Investments fell to ₹45,409 crore in November from ₹52,486 crore in January after touching a year-high of ₹55,370 crore in April. Fund deployment in the auto ancillary segment also declined, although marginally at 2.26 per cent, to ₹27,800 crore from ₹28,443 during the same period.
According to Society of Indian Automobile Manufacturers data, passenger vehicle sales showed moderate growth in H1-CY18, while sales in H2-CY18 remained sluggish on poor customer sentiment, which failed to revive even during the festival season. On the other hand, the commercial vehicles segment witnessed decent growth during the year.
“We expect demand recovery in CY19, driven by decline in fuel prices as well as rural market recovery. While H1CY19 might be relatively weaker, H2CY19 would see strong growth,” Gandhi said.
Regulatory factors, elections
Industry may also witness some regulatory bump in demand. “Multiple regulatory factors in CY20 (including BS-VI emission norms) might lead to pre-buying in CY19,” Gandhi said, adding that adverse results of the General Election could negatively influence the positive outlook for H2CY19.
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