It is a well known fact that automobiles form an integral part of every economy. Automobiles are very essential for the movement of men and material. In India, automobile industry has come up a long way. 25 years ago, only upper middle class people could afford to have a motor cycle. The rich people could possibly have a car. But today, the scenario has changed and even middle class families own a car. Let us now analyze the automobile sector from the stock market point of view. We will discuss the BSE Auto Index as well as some popular stocks.
The BSE Auto Index:
The BSE Auto Index has a free float market capitalization of Rs.81,458 crores and 17 constituent stocks. Bajaj Auto (weightage: 17.91%), Tata Motors (17.57%), Mahindra & Mahindra (also known as M&M, 15.19%), Maruti (12.24%), Hero Honda (7.67) are the top 5 in terms of weightage. It may be noted here that these stocks are also constituents of Nifty.
In the weekly chart displayed below, a “double top” formation can be observed. During May 2006 the auto index reached a high of 5844. Within about one month, it fell to a low of 3960. In February 2007 it once again made a high of 5882 but could not close above its previous high. Between May and July this year, a similar double top pattern was formed and the index has broken its support as can be seen from the chart. These indicate that the Auto Index is bearish. The next supports are at 4073 and 3960.
Chart Courtesy : BSE
Top Auto stocks:
These can be classifed into 4 categories viz.
- 2 and 3 wheelers (Bajaj Auto, Hero Honda, TVS Motor etc.)
- Light Commercial Vehicles (LCV) and Heavy Commercial Vehicles (HCV - Ashok Leyland, Tata Motors etc.)
- Passenger cars (Hindustan Motors, Maruti Udyog)
- Tractors (Escorts, Punjab Tractors etc.)
Two and Three wheelers:
| Scrip | 5 year return % | Recent Loss % |
| Bajaj Auto | 402.36 | (33.16) |
| Hero Honda | 122.87 | (31.66) |
| LML | (63.90) | (79.94) |
| Maha. Scooter | 269.97 | (41.23) |
| TVS Motor | 23.89 | (68.35) |
LCV’s / HCV’s:
| Scrip | 5 year return % | Recent Loss % |
| Ashok Leyland | 244.97 | (33.65) |
| Eicher Motors | 359.27 | (17.90) |
| Swaraj Mazda | 334.38 | (28.37) |
| Tata Motors | 371.84 | (35.70) |
Passenger Cars:
| Scrip | 5 year return % | Recent Loss % |
| Hindustan Motors | 208.64 | (57.45) |
| Maruti Udyog | 236.70 | (21.88) |
Tractors:
| Scrip | 5 year return % | Recent Loss % |
| ESCORTS | 51.29 | (46.39) |
| HMT | 127.38 | (44.11) |
| M&M | 1,268.71 | (37.69) |
| PUNJABTRAC | 56.31 | (32.07) |
Possible causes of the weakness in automobile sector:
- Increased interest rates
- Excess inventories
- Increasing competition
Mahindra & Mahindra, TVS Motors, Punjab Tractors, Hero Honda and Bajaj Auto showed decline in their earnings during fourth quarter for financial year 2006 – 07 whereas Ashok Leyland and Maruti Udyog had more earnings than the previous quarter.
Let us now discuss the long term outlook for some important stocks.
Ashok Leyland:
The monthly chart of the stock is displayed above. Using Elliott wave theory, we can come to the conclusion that waves 1 through 5 are already over; corrective wave ‘a’ and pullback wave ‘b’ are also complete. Now the last leg of correction is in progress. The stock is on the verge of testing its 38.2% retracement levels. A bearish “three outside down” candlestick pattern has been formed. If 34.50 is breached on a monthly basis, we can expect a bearish target of 22.90 in the long term.
Eicher Motors:
As can be seen in the chart above, the stock is locked between 202 and 415 for almost 2 years now. Only a decisive monthly close above 415 with good volumes will move the stock further upwards. But a close below 202 will make the stock bearish.
Tata Motors:
Like Ashok Leyland, this stock is also in wave ‘c’. If it closes below 637 in monthly charts, it may have a bearish target of 415 in the long term. Note that the volumes were maximum during wave 3 in 2003.
Conclusion:
Long term investors can exit the automobile sector at every higher level. Medium term and short term trends are weak; so it is better to avoid these stocks. Day traders/future traders however, may go either way depending on intraday charts.