Tuesday, May 12, 2009

Focus on Auto Sector

Car and bike sales for the month of April 2009 have gone up. And based on this, Mr.Gupta has been buying up shares of auto component makers and most of the front line auto stocks. And it is not just Mr.Gupta who has been buying. There are many like him who have become bullish on the auto sector. There are also quite a few who believe that this rise in April sales marks an end to the slowdown. They feel its time to invite the bulls over on Dalal Street permanently. But is that so? Is this optimism right?

Absolutely not! This is like celebrating the arrival of the baby the moment the news of pregnancy is declared. Yes, the news is good but it’s too early to celebrate. Mere surge in car and bike sales is not enough. The real mover of the economy is the truck sales. So unless and until the truck manufacturers declare a surge in their sales, there is really no recovery.

Why so much significance to truck sales? Well, it is the trucks which move goods from place to the other. And goods will start moving once industrial activity picks up and demand shows a rise. That in the right sense would mark the kick start of economic revival. But right now, that is not happening. Falling truck sales means that demand is low and there is no need for additional trucks to move goods from one place to the other. So the revival is yet to really happen.

As per figures released by the Society of Indian Automobile Manufacturers (SIAM), motorcycle sales in the country during the month was up 12.11%. Total two-wheeler sales in April rose by 13.71% and domestic passenger-car sales increased by 4.20%. Last year around this time around this time, the gloom in the auto sector was just about beginning to spread. The pile up of inventory, rising raw material costs and falling demand started taking its toll. But this time around, the first month of fiscal 2009-2010 has been good, especially for the car makers. Except for Mahindra Renault, which showed a 68% drop in its sales growth for April, all others have reported a positive growth. Maruti sales was up 9%, Hyundai was up 3.5%, Honda 7.5%, M&M by a sharp 35%, Hero Honda by 29.5%, TVS by 3% and Yamaha by 48.3%.

Commercial vehicle sales were down 11.25%. Ashok Leyland reported a 69.33% decline in commercial vehicles sales in April. Its domestic sales for the month stood at 1,615 units against 5,549 units in corresponding month last year, down by 70.90%. Tata Motors, for the first time since Sept 2008, has registered a YoY increase in April in LCV sales though M/HCV sales were down 28%. So recovery is yet to really happen, that’s the writing on the wall.

What does the rise in car and bike sales mean? Does it not indicate a revival in demand? Yes, it does mean that people have started buying cars and bikes but that buying alone is not enough for the companies and the economy to bounce back. It is good news but not good enough.

And in case of auto component makers, it would take a while for the perk up in demand to percolate down to them. It would be too early to stock up on these auto component stocks. Well, if you have the holding power, you can stock up. And in that context, you can stock up on almost any good stock as whatever goes down does come up, some time or the other. That’s the cycle of life.

Source: www.premiuminvestments.in (By Ruma Dubey)

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