Auto sector problems to continue as downgrades loom under Pandemic
Published On: Tuesday, April 27, 2021 | By: Team KnowMyStock
Over the past three months, the BSE Auto index has been underperforming the benchmarks amid multiple headwinds, including weak retail, rising commodity prices, and supply disruptions. The auto index, after outperforming the benchmarks for most of FY21, is down about 9 percent, as compared to the 2 percent decline in the Sensex during the last three months. The derating on the one-year forward price to earnings ratio has been higher, about 18 percent since January. Most analysts believe these headwinds will remain in the near term. “Due to the ongoing economic slowdown amid the second wave of Covid, the turbulence (demand woes) the sector is facing for over a month and a half is expected to continue into May, as well. On the other hand, higher commodity prices and other cost inflation would impact operating margins of these companies in the June quarter of FY22 and beyond.” say experts.
Prices of key inputs — such as steel, aluminium, copper, natural rubber, and precious metals — have been trending up. To tide over the rise in costs, auto companies had hiked prices in the December and March quarters, with the latest round of hikes effective from April 1. However, these hikes are not enough to offset the surge in costs and can lead to further downgrades. Analysts at IIFL Securities believe management commentary on incremental pressure in the first half of FY22 may lead to earnings downgrades.
Given the situation investors should await clear signals on the margin movement and more importantly, demand improvement before considering an investment.
Tags: Auto sector BSE Auto index
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