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Investors should stay away from auto sector: Bharat Gianani, Sharekhan

The rally is not sustainable and we have already seen correction in the auto stocks.

ET Now|
Sep 27, 2019, 04.38 PM IST
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Despite the corporate earnings tax cut and the benefit that the auto companies will see, we believe the volume recovery is not yet seen and if the companies choose to pass on the entire benefit, then the benefit that they are getting from the corporate tax will get nullified, says Bharat Gianani, Auto Analyst, Sharekhan. Excerpts from an interview with ETNOW.

JLR is looking to suspend production at the UK plants for a week. How is it different this time versus the regular shutdowns or the annual shutdowns that they plan for the company?
his time around, it has more to do with the uncertainty surrounding the Brexit. As per the developments that have panned out over the last one or two months, it looks like Britain will exit the European Union without a deal. The last date for the deadline that the European Union has given to UK is 31st of October. It looks like Britain will leave the European Union without a deal because a deal at this point of time does not look feasible because although the Britain Prime Minister has been negotiating with the European Union, they do not seem to have reached a conclusion. Also the Prime Minister has said that he would leave the EU even if there is no deal.

In the last couple of months, we have seen a decent uptick come by in the China market for JLR sales. But now again the management has reiterated that it still continues to be a huge matter of worry.
In China, one or two months might have been good because of the low base that the company has seen, but overall the Chinese economy is still slowing down. This again resurfaces the concern that the strength in the Chinese market is not that much if you see the premium segment.

Also, apart from China, the market continues to remain weak in other key markets, In Europe, the slowdown has been extended. Due to the Brexit uncertainties and low consumer sentiment, the UK economy is also on a slowdown.

We have seen North American car sales are also on a decline mode. So if we analyse, the major markets that JLR operates in are showing signs of weakness. The August numbers are again down by 7% and YTD it is down by 8%. So. the market weakness continues.

When we look at Maruti, they have gone for some price cuts. Bajaj has also passed on a little bit of price cuts. Do you think that this is too early? November-December is when these companies generally cut prices. Is it the December buying that is happening now?
No, price cuts are normally given to boost the festive demand and with the festive season beginning over the next few days, in order to revive the demand or give a sweetener to the consumers, the discounts are given normally around this time. It is a good strategy to ramp up the festive sales.

There is very limited headroom for the companies to pass on the entire benefit of the tax cut which they are getting. The profitability of the auto sector is on the lower side and given the tax cuts, even if they choose to pass on the entire benefit, it will be in the range of 1% to 3%. That is unlikely to prop up demand in a significant manner. but it will give consumers a positive sentiment.

In terms of auto names, which are the stocks that you like?
We are cautious on the automotive stocks and we have been advising investors to stay away from the sector. We continue to maintain the stance. So despite the corporate earnings tax cut and the benefit that the auto companies will see, we still believe the volume recovery is not yet seen and if the companies choose to pass on the entire benefit, then the benefit that they are getting from the corporate tax will get nullified.

As you rightly pointed out Maruti has announced a price cut of Rs 5,000. Even Bajaj has gone ahead and announced a price cut. If the companies pass on the benefit, then eventually the benefit that they were supposed to get from the corporate tax cut that will get nullified.

We believe this rally that we have seen is not sustainable and we have already seen correction in the past one or two days for the auto stocks.

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