Auto stocks have put up a good show since the last Budget. While the correction that took place since last September has reduced the returns to some extent, many of the front-line auto stocks such as Tata Motors, Maruti and TVS Motors gained over 30 per cent, and most others managed double-digit returns. This good performance rubbed off on the auto ancillary stocks as well with most of them doing well in an otherwise lacklustre market.

The business since last Budget can be split into two parts, pre-demonetisation and post-demonetisation. Between April and November, demand for passenger cars remained good due to better purchasing power of the urban customers, launches of new cars and variants, seventh pay commission pay-outs and declining borrowing rates. The gung-ho mood of the urban consumer also reflected in brisk demand for high-end luxury bikes. Tractor makers witnessed good demand due to normal South West monsoon and LCVs too recorded a pick-up in demand in the first eight months of this fiscal.

Stocks forming the Nifty Auto Index (with the exception of Eicher Motor) recorded 10 per cent growth in revenue and 15 per cent increase in profit in the six months to September 2016 compared to the corresponding period in 2015.

While Maruti led the pack with 43 per cent jump in earnings in the six months period, other companies such as Hero Motocorp, TVS Motors and M&M too recorded more than 20 per cent earnings growth in the first two quarters of FY17. Tata Motors put up a sluggish performance, dragged lower by its domestic performance even as JLR sales continued to rev up.

Similarly, many auto ancillary stocks such as Bosch, Motherson Sumi and Exide continued to show traction with earnings growth of over 20 per cent. Tyre stocks such as Apollo Tyres and MRF, however, lost momentum in the first half of the fiscal as rubber prices began firming up.

But the picture has altered since December, when the effect of the cash crunch following the Centre’s decision to ban high value notes was reflected in auto sales numbers.

Two-wheeler sales were the most affected with volume decline between 8 and 34 per cent recorded by the manufacturers, with the exception of high-end bikes such as Royal Enfield. Passenger car sales were not too greatly impacted with Maruti recording a mild 4.4 per cent decline in December sales, thanks to strong order book in the utility vehicle segment and new launches. While commercial vehicles also took a hit, tractor manufacturers such as M&M and Escorts grew their sales by 8 and 12 per cent.

While the slow-down due to demonetisation is expected to be temporary, the sector will be looking forward to the Budget proposals to simplify tax structure and propose concrete measures to boost demand.

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