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AUTOMOBILE SECTOR IN INDIA : 2009

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03/07/2009 :

AUTOMOBILE SECTOR IN INDIA : 2009

Automobile sector in India which was some years ago was termed as the robust sector lead to the halves in the current recession times. The auto sector comprises of big names such as. Bajaj Auto (weightage: 17.91%), Tata Motors (17.57%), Mahindra & Mahindra (also known as M&M, 15.19%), Maruti (12.24%), Hero Honda (7.67) are the top 5 in terms of weight age.( as per the data provided by the BSE Auto index ).It was noticed in the year 2007 that the Auto Index breached its support level of 5882 and thus indicated that the Auto Index is bearish and thus the index found its next support level at  4073.

While as per the latest data of the BSE the Auto index has made a come back with the bull market and it underwent in one of the longest and positive cycles of the year 2008. Thus the Auto index has a negative correlation with the stock market. While On the other hand the sales growth on year on year basis has shown a decline.

Undertaking the current scenario of the auto industry in India it will be appropriate to comment that with weak macroeconomic indicators such as liquidity crunch, credit unavailability and the slower industrial production with negative consumer sentiments which are unlikely to improve in the coming future, the rosy picture of auto index which was seen in the year 2007 may not repeat very soon.

While the investor still bet on the strong fundamentals of the auto sector in India but seeing the export figures of these companies, it is assumed that due to decrease of exports in their respective markets, theses companies will take one more cycle to rectify their valuations listed on the exchange.

The other possible causes of weakness in the auto sector which can lead to bearish phase are:

Negative sales : seeing the higher interest rates which are prevailing in the banking system of India discourage the consumer, the  increased financing costs and lack of credit availability add more to the worries . Domestic car sales remained largely flat as shown in the current year data. The extent of decline is also due to the launch of new models in the markets which led to the re-alignment of market share away from players with aging product portfolios.

Increased working capital: slower demand with lag of payments has led to inventory pileups thus the companies are having excess inventories in the plants. However, corrective measures have been taken up by the companies, primarily in the form of cutting back on production to prevent further inventory pile-ups. But these production cuts have taken place with a lag effect, resulting in stretched working capital cycles for most OEMs and putting further pressure on their liquidity.

In the current scenario there are negative outlook in the auto sector however it is limited for short term period, but in the long term the fundamentals looks firm and positive. The recovery of sector is entirely dependent on the improved liquidity crunch, availability of credit and improvisation in the demand side with reconstruction of inventories. The U.S government has already come out with the stimulus package for the automobile sector in U.S. However the requirement of such bail out package will not be required urgently in the Indian market if there is better credit availability for these companies. 


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