Auto stocks rally: Q3 earnings preview and sectoral outlook

The Nifty Auto Index was the biggest performer on Monday, amid an upbeat sentiment in the market. Hero Motocorp, Maruti Suzuki, Tata Motors, M&M were among the biggest gainers. 

Of late, many research houses have pointed out that the sector could see a good rebound in 2022, after being out of favour in the last few months. 

How did the auto sector fare in December?

Most of the top companies in the two-wheeler sector had reported sales numbers above expectations. Due to the ongoing semiconductor shortage and supply side disruptions, analysts had expected that the sales would be lower. Read our detailed report on auto sales data for December 2021. 

Q3 earnings Preview for the Auto Sector

• Auto sector earnings for Oct- Dec 21 period are set to show some improvement from the previous quarter. Near normal economic activity, extended monsoons, muted festive retails (down 18% YoY, at ~80% of pre-Covid levels) and gradual improvement in chip supplies were the major highlights for Oct- Dec 21 period. The table below shows ICICI Direct’s expectations from Q3 earnings for the Oct- Dec 21 period. 
• As guided by various managements in the industry, gross margins are expected to further decline in Q3FY22E but sequential volume recovery is expected to improve.

Outlook for the future

• Analysts point out that the sector is set for a rebound in 2022 as the demand continues to improve. The margins have largely bottomed out, and are expected to recover from a cyclical though. Softer prices of key commodity inputs like steel and aluminium are expected to aid margin recovery. 
• The benefit of price hikes carried out by automakers is expected to come through in the upcoming quarters. 
• The rural demand could see an uptick as there are expectations of announcements in the upcoming Budget 2022. Apart from that, strong balance sheets of listed companies, uptick in export revenues and electric vehicle (EV) launches should also bode well for the sector. 

Given favourable long-term expectations for the sector going forward, ICICI Prudential as well as Nippon India have launched India’s first auto sector ETF. You can read our review here.