Nifty Auto index uptrend hits a speed bump, falls 4.3% in August; Balakrishna Industries, Bosch lead decline

It looks like Indian auto stocks were running out of fuel after a prolonged journey that saw them achieve new milestones and deliver impressive performances. The sector had been on a remarkable upward trajectory for months, consistently reaching new heights and capturing investor attention.

However, August has marked a notable shift. After eight consecutive months of bullish momentum, which spanned from November 2023 to July 2024, the Nifty Auto index has taken a significant hit, tumbling 4.3 per cent in August so far.

The decline in auto stocks followed weak financial results from auto companies for the June quarter and a slowdown in passenger vehicle (PV) sales in the first quarter of the current financial year. These factors pushed inventory levels to record highs, negatively impacting investor sentiment toward the sector.

Amid this, analysts have downgraded their ratings for PV manufacturers. Many predict that the Indian auto sector will undergo a consolidation phase in FY25, considering the high-performance levels of the previous year.

Despite record-breaking sales of over 1 million units in Q1 FY25, the growth rate was only 3 per cent. The Society of Indian Automobile Manufacturers (SIAM) had earlier forecasted PV growth for FY25 to be below 5 per cent, citing increased competition and excess supply as major challenges.

While PV sales exhibited moderate growth, the 2W segment saw a strong recovery in 1QFY25, with wholesale volumes rising by 21 per cent year-on-year. This growth was driven by a rebound in demand within the replacement segment in rural markets, robust performance in the premium motorcycle category, and a lower base effect.

Additionally, the scooter share in two-wheeler volumes increased by 190 basis points year-on-year in 1QFY25, partly due to a rise in scooter demand across regions, fuelled by greater EV adoption.

Looking at the top losers in August, Balakrishna Industries led with a 14 per cent drop, following multiple brokerage firms lowering their target prices after the company's June quarter results. Bosch and Apollo Tyres also saw declines, each falling 8 per cent within the Nifty Auto Index.

Other notable declines include Tata Motors, down 7 per cent; Maruti Suzuki, down 6 per cent; and Mahindra & Mahindra, which dropped 5.3 per cent. Additionally, Exide Industries, Samvardhana Motherson, Eicher Motors, Bharat Forge, and MRF saw declines ranging from 2 per cent to 6 per cent.

PV Inventory levels are at a record high

The slowdown in demand for passenger vehicles has pushed the inventory at auto dealerships across the country to an all-time high of over 700,000 units worth ₹73,000 crore, according to the Federation of Automobile Dealers Associations (FADA).

FADA said that the vehicle stockpile has climbed from 65–67 days in early July to 70–75 days now. FADA Vice President CS Vigneshwar said that the high inventory poses a substantial risk to dealer sustainability, necessitating extreme caution.

He has also urged PV original equipment manufacturers (OEMs) to be vigilant about potential dealer failures due to these high inventory levels.

India’s passenger vehicle sales rose by 10 per cent in July, reaching 320,129 units, according to FADA data. However, PV wholesales for July saw a year-on-year decline of 2.5 per cent, standing at 3.41 lakh units, largely due to the high base effect from the previous year.

Largest car maker scales back production

Maruti Suzuki India is scaling back its production in response to lower-than-expected passenger vehicle demand in the first quarter of the 2024–25 fiscal year. Suzuki Motor Corporation (SMC), the company's majority shareholder, confirmed this move, as per a Business Standard report.

Livemint could not independently verify the news development.

“We are currently adjusting production to reduce market stock and are closely monitoring demand trends. India will be in a critical period with the upcoming festival season, so we will closely monitor demand trends," Suzuki Motor Corporation told analysts in a conference call, Business Standard reported, quoting the transcript of the call.

Despite a 7.4 per cent year-on-year increase in production to 496,000 units during the first quarter, sales growth lagged significantly, rising by only 1.2 per cent to 427,000 units, according to the Business Standard report.

In 1QFY25, Maruti Suzuki's market share declined by 70 basis points year-on-year (excluding sales to Toyota). This drop was primarily due to significant losses in market share in Andhra Pradesh, Telangana (570 basis points), and Karnataka (80 basis points). However, these were partially offset by gains in Kerala (390 basis points) and Tamil Nadu (50 basis points).

Meanwhile, Mahindra & Mahindra and Toyota Motor saw market share increases of 200 and 160 basis points year-on-year, respectively, while Tata Motors experienced a 40 basis point decline in market share, according to Kotak Institutional Equities.

Mixed views on M&M

Citi has lowered its price target for Mahindra & Mahindra (M&M) from ₹3,340 to ₹3,180 while maintaining a 'Buy' rating. This adjustment reflects a challenging outlook for the SUV market, where M&M holds a significant share.

Despite the reduced target, Citi highlighted that M&M's tractor segment continues to perform well. The demand for M&M's SUVs has not met previous expectations, even with the company's expanded production capacity, leading to a revision in volume and earnings forecasts for this segment.

Other brokerages, however, remain optimistic about M&M's prospects. Nomura has upheld its 'Buy' rating with a revised target of ₹3,417, and Morgan Stanley maintains an 'Overweight' stance with a target of ₹3,304, particularly encouraged by the anticipated success of the new Thar Roxx—a five-door variant of the popular Thar off-roader.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.