Auto Stocks Outlook: Down next wk on high inflation, rising rates

[B. Karthick]

Auto Stocks Outlook: Down next wk on high inflation, rising rates
Saturday, Jul 5

Shares of automobile companies are likely to continue their
southward movement next week as the industry is reeling under the
impact of high inflation, and rising fuel prices and interest rates.
India's headline inflation scaled a new 13-year-high at 11.63% for
the week ended Jun 21 from 11.42% in the previous week.
Inflation is expected to further climb to 13% in the near term.
In the last three months, RBI has already hiked cash reserve ratio
by 125 basis points and repo rate by 75 basis points. A further rise
in inflation will prompt fresh action, which is hugely negative for
the automobile sector.
India's inflation rate has been steadily rising since October on
the back of rise in commodity prices, especially steel, crude and
edible oils.
Rates for automobile loans have risen almost 300 basis points
during the current calendar year to 15-16% levels for four-wheelers
and 12-13% for two-wheelers.
Apart from interest rates, the two-wheeler sector is especially
suffering, as banks are not willing to lend fearing delinquency. ABN
Amro Bank, for instance, has pulled out its entire auto loan
portfolio.
The automobile sector is also suffering because of soaring raw
material prices, which are denting their profit margins.
Although automobile makers have passed on some of the impact to
customers, they still are being forced to absorb a major portion due
to already diminishing sales.
Steel prices have hardened almost 21% during 2008, while aluminium
has risen by 16%.
Rubber and plastic prices have also gone up substantially by 17%
and 24% respectively.
The technical trend in auto counters is seen weak.
Bajaj Auto will see resistance at 465-475 rupee levels.
On the country's biggest motorcycle company Hero Honda Motors
Ltd.is likely to trade sideways as it has no clear trend.
It is in this cluster of resistance and support. It has the next
support
at 650 rupees.
Mahindra & Mahindra will find support at 400-425 rupees.
Maruti Suzuki is the safest bet in the automobile sector.
Maruti's vehicles have the lowest cost of ownership among all
brands. It is the least affected company in the current interest rate
and inflation scenario.

Following are this week's prices, in rupees, of key automobile
shares, compared with the previous week, on National Stock Exchange:

Jul 4 Jun 27 Change (%)

Ashok Leyland 28.75 32.35 -11.12
Bajaj Auto 421.00 512.10 -17.78
Hero Honda 666.60 758.30 -12.09
Mahindra & Mahindra 475.10 574.20 -17.25
Maruti Suzuki 548.80 728.35 -24.65
Tata Motors 400.25 489.65 -18.25

BSE Auto Index 3,432.41 4,042.86 -15.09
Nifty 4,016.00 4,347.55 - 7.62
Sensex 13,454.00 14,571.29 - 7.66
End

B.Karthick,
Research Analyst.