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Wednesday, July 7, 2010

Sector Scan - Automobile Stocks

Automobile sector is very happening sector in India. Even the rising fuel price constraints are not enough for auto companies to slow down. In such scenario, should one consider buying stocks of automobile companies?

Cut throat competition among top companies, lots of new car and vehicle model launches at regular intervals keeps the Indian auto sector moving. Industry veterans have opined on recent fuel price hike that it could affect only for very short frame of time. It won't affect in long term.

The reason behind this optimism is that auto sector is likely to remain buoyant in FY 2011 with strong volume growth and better than present margins for auto stocks.

Conservative projection for automobile sales volume growth is of 13 - 14% and the actual expectation for FY 2011 is of ~20% volume growth in car segment. Same growth is expected in two wheelers. And check this, heavy trucks segment volume is expected to grow at astonishing 25%. This view is being expressed with inputs from vehicle dealers, vehicle financiers, truck operators, auto component suppliers and such entities. Vehicle dealers have confirmed the demand for vehicles continue to remain strong and that their inventory levels are very low. They don't need to stock up the vehicles for long and that the demand is buoyant.

On the other hands, commodity prices are loosing it's shine. With commodity (steel and other metals) prices dropping, automobile sector stocks would benefit by reduced input costs.

Based on all these inputs, bullish trends are being predicted for auto market. Earnings for FY 2011 are expected to increase by 1 -12% and again at 0 - 10% in FY 2012. Since earnings prospects are looking bright, automobile sector stocks may appreciate by up to 5 - 15%. Top stocks to buy at this moment from auto sector are could be Tata Motors, Ashok Leyland and Bajaj Auto. Maruti excludes this list as one of their largest export market is in Europe and EURO as a currency could reduce their gains overall.

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