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Auto stocks rally despite low growth expectations

Rising interest rates, fuel prices is likely to result in a slowdown in car sales in 2012. Fitch says that historically, there is a direct relation between the state of the buyers’ personal finances and car sales.

BMW MINI Cooper S
BMW MINI Cooper S

Shares of automobile companies rose sharply on Tuesday. The BSE Auto sector index gained close to 3 per cent while the BSE sensex rose over 2 per cent indicating an outperformance. Tata Motors shares rose 2.4 per cent while Maruti Suzuki shares gained 1.4 per cent. Mahindra & Mahindra jumped 5.6 per cent. Hero Motocorp rose 2.4 per cent.

The response to the Auto Expo 2012 could perhaps suggest that car makers are looking at the Indian market more seriously than before. Analysts say that car companies are making new models that could appeal to the Indian consumer.

India sees close 2 million cars sold each year.

Credit rating agency Fitch Ratings put a stable outlook on the Indian automobile sector. The agency expects the competitive landscape in 2012 to intensify with subsidiaries of foreign auto makers increasingly looking at the Indian market for growth. 

The agency though has raised some red flags going forward.

Rising interest rates, fuel prices is likely to result in a slowdown in car sales in 2012. Fitch says that historically, there is a direct relation between the state of the buyers’ personal finances and car sales. As financial liabilities rise due to rising interest rates, car sales could slow down.

Fitch predicts only three to five per cent growth in passenger car sales.

The agency also says that heightened competition in the Indian auto market to lead to a fall in operating margins. In addition, with overall demand in the industry likely to remain muted in 2012, original equipment manufacturers or OEMs are likely to respond with price discounts to shore up volumes. “This is likely to further stress industry players' by 2.5-3 per cent operating margins this year,” the agency observed.

Fitch also expects auto companies to borrow more for expanding capacity.