“Post-Covid, auto shares have experienced a bull run, and despite some adjustments over the past six months, valuations remain stretched,” said Krishna Appala, senior research analyst, Capitalmind Research. “If earnings growth doesn’t hold up, corrections of around 10-15% are likely, as share prices have already surged over the last three years.”
Since April 2020, the Nifty Auto Index has surged 430% as against the 201% up move in the Nifty. Among auto shares, Maruti Suzuki gained 186%, Tata Motors soared 1,250%, Mahindra & Mahindra jumped 892%, Bajaj Auto rose 390% and Hero Motocorp advanced 212%.
The elevated valuations in auto shares after the run-up in the share prices prompted Hyundai Motor India to launch the country’s largest IPO of ₹27,870 crore. The mega Hyundai IPO might have signalled a top for auto shares, reflecting in the stock making a weak debut on the bourses on October 22. The stock is currently 7% below its issue price.
“The Hyundai IPO earlier this month marked the peak of valuations in the sector, with Hyundai trading at 27 times price to earnings (PE) ratio, while market leader Maruti Suzuki is trading at 24 times PE,” Appala said.
Analysts said signs of a slowdown in automobile demand is weighing down sentiment.
India’s largest two-wheeler maker, Bajaj Auto guided for lower two-wheeler sales growth in its second-quarter results. The company’s shares plunged 13.1% post the result s – the largest single-day fall since March 2020- – with the pessimism rubbing off on its peers, Hero Motocorp and TVS Motor, which fell over 3% each. “The momentum in two-wheeler stocks was strong ahead of Bajaj Auto’s guidance on weak festive demand,” said Mumuksh Mandlesha, Research Analyst, Anand Rathi Institutional Equities.
The auto sector peaked in November 2023 in volumes, followed by a small uptick in April this year, said analysts. Since then, auto sales have declined, and the sector is currently amid a sluggish phase in the cycle.
Appala noted that vehicle inventories have risen to around 77,000 units, compared to an average of 67,000, indicating a slowdown.
“The sector has been facing slow growth since Q1, initially overshadowed by election uncertainty,” said Krishna Appala, senior research analyst at Capitalmind Research. “However, the sluggish growth persisted in Q2 as well. Bajaj Auto’s commentary also indicates a slowdown.”
A Buying Opportunity?
Auto shares are expected to remain under pressure over the next two to three quarters, he said. The near-term catalyst for the auto sector could be an overall uptick in consumption, driven by interest rate cuts.
Mandlesha said that the corrections in auto shares could be a buying opportunity for investors. He expects two-wheeler shares to do better than those in Passenger Vehicle and Commercial Vehicle segments
“Given that the demand is subdued in the PV segment and high valuations, Hyundai has witnessed corrections after the IPO, but it remains a structurally strong player in the sector.”