Softening commodity prices lift auto stocks

Eicher Motors,

, , Mahindra & Mahindra, , and gained between 3.6% and 6%. The Sensex closed with a 0.86% gain at 52,265,72.

“Investors are sensing an opportunity in auto because metal prices have been falling, while there are signs of demand firming up in the Passenger Vehicle segment,” said Kunj Bansal, CIO, Investment-Illiteracy.com.

Several value investors have already been mopping up beaten-down automobile stocks of late, helping the sector outperform the market in recent months. The BSE Auto index has gained 2.9% so far in 2022, while the benchmark Sensex is down 11.7% during the period.

Analysts said despite the recent performance, there is still some more steam left in auto stocks.

“The cycle in auto stock rallies typically last for 24-30 months. Now that they have gained in the past six months, there could be outperformance for two more years,” said Bansal.

Auto stocks have been under pressure in recent years due to supply side woes, low uptake in consumer demand and margin pressure led by high raw material costs.

“In the last two years there has hardly been any growth and from a low base there’s expectation that we will see growth across the auto sector. It is expected even passenger vehicles will register growth in the next few months,” said Pankaj Pandey, Head of Research at ICICIdirect. Pandey pointed out that in the last few quarters, the margin profile of some companies had gone down due to poor sales and steel prices but in the last two months steel prices have corrected which is good for auto companies.

“While crude oil prices have been high, domestic prices of petrol and diesel have not risen. The domestic prices post tax cuts are lower,” said Pandey, who is bullish on Tata Motors, Ashok Leyland, and Mahindra & Mahindra with expectation of double digit returns.

The government’s decision to increase duty on steel exports, which has eased prices, has improved sentiment in auto stocks. The resultant decline in steel prices would be positive for automakers which have been facing high input cost pressures over the last one year.

Gaurav Dua, Senior VP and head of capital market strategy at Sharekhan by

is bullish on Mahindra & Mahindra, Maruti Suzuki, and Hero MotoCorp.

“We will start seeing better monthly volume growth and after the run up also the auto stocks are reasonably priced,” said Dua.