Auto stocks under pressure as rising Covid-19 cases impact sentiment

The rising rate of Covid-19 infection across Maharashtra, one of the largest auto hubs in India, has led to weekend shutdowns and night curfews in several districts. Maharashtra recorded this year's highest one-day spike of 16,620 new cases on March 14 and this development is also exerting pressure on the automotive stocks.

Though the Auto Index has come off its intra-day lows, stocks like Bajaj Auto, Hero MotoCorp and M&M continue to see close to two percent losses.

But that’s not the only reason that several of the auto stocks are in the red. The US bond yields at a 13-month peak, inflation (WPI or wholesale price index) at 27-month highs also impacted sentiment.

What has exacerbated the impact is the resurgence of Covid-19 cases in the auto hubs of Pune and Aurangabad which will have a cascading impact on the automobile industry. Maharashtra, one of India's key automobile manufacturing hubs, houses factories of all vehicle segments from two-pager and three-wheelers through to passenger vehicles and commercial vehicles. Bajaj Auto, Piaggio, Tata Motors, Mahindra & Mahindra, Force Motors, Jeep India, Mercedes-Benz India, Audi India, Skoda Auto Volkswagen India, and some EV OEMs like Jitendra EV Tech all have manufacturing operations in the state.

A number of these plants are located in regions which are currently seeing governmental restrictions on people movement. For instance, the automotive component hub of Aurangabad which has a number of leading Tier 1 suppliers like Varroc Group, Endurance Technologies, Seimens, Aurangabad Auto Ancillary and the like and is among the places in the state which are seeing restrictions to combat the spread of the pandemic. 

Meanwhile, OEMs continue to face challenges in the form of the continuing shortage of semiconductors, which is hampering high levels of production. If the steep decline in stocks has thawed by close of session, then it's because the stock market and its movers and shakers seem to have reconciled that the on-ground situation in key auto locations is not as bad as it seems. But expect ample movement in Auto Stocks Inc in the next few days.

In a tweet on March 15, which is indicative of the seriousness of the situation, Anand Mahindra, Chairman of the Mahindra Group, said: “Over half the new daily cases are in Maharashtra. The state is the nerve-centre of the country’s economic activity & more lockdowns will be debilitating. Maharashtra needs emergency permission to vaccinate EVERY willing person. No shortage of vaccines. If we don’t speed up the vaccination rate we will suffer second, third and fourth waves.”

Commenting on the development, Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, “The dollar index cooling to 9.16 is a positive for capital inflows the 10-year bond yield hovering around 1.64 is a concern. The rise in core inflation, mainly pushed up by commodity price rise, is a concern. Looks like we are at the trough of the interest rate cycle. Recent Covid resurgence is another concern."

While the crest and trough of the market continues, it is interesting to note that over the past six months the BSE Auto Index has gained over 28 percent and clocked a robust 67 percent gains in the past one year, giving a thumbs up to the cost rationalisation initiatives and other growth strategies adopted by the auto companies.