Why it is better to avoid auto stocks for now

If you see Maruti and other auto companies numbers last quarter and this quarter, there is a severe margin compression there. It will be difficult for them to pass on the hike in raw material cost, steel especially and other costs, says Daljeet Singh Kohli, CIO, Stockaxis.com

On monthly auto sales figures
Maruti is not impacted too much by the chip shortage because their vehicles are mostly in the mid range where they do not have too much automation and so they were able to manage that well. More important for Maruti would be how the rural sales pan out because this time we will see the impact of monsoon as well as the Second Covid Wave which was far more spread across the country and was not just a metro phenomenon but was spread in tier III, tier IV and other towns.

So I guess next month onwards we will have to see how those numbers pan out. Maruti’s profile is turned more towards this kind of customer base. Companies like BMW and Mercedes are more impacted or Tata Motors which is now talking of EV and other things.

As a house, we are not very positive or constructive on the auto sector as such. We do not have any of these stocks in our portfolio except one or two ancillary companies that are playing on the domestic. Otherwise we are feeling that probably there will be two major impacts on all these auto companies; one will be on the top line and it is difficult to manage;, second the pressure on the margins. If you see Maruti and other auto companies numbers last quarter and this quarter, there is a severe margin compression there. It will be difficult for them to pass on the hike in raw material cost, steel especially and other costs. We will wait for some more time to be constructive on this sector.

On UPL result
I cannot talk about the charts but in terms of fundamentals, I would say agrochemicals is one of our favourite spaces. We are very bullish on this space and we have three names in our portfolios -- Atul Ltd, Bharat Rasayan and Astec. We have avoided UPL mainly because of two reasons; one is that it has too much debt. Although it is good to talk in terms of debt/EBITDA and all of that, in terms of absolute numbers, it is still more than Rs 20,000 crore. Agriculture being dependent on weather, anytime this can become a very adverse situation for them.

Secondly they are highly diversified in terms of geographies. So if one geography does well, another geography drags it down. At the end, they get only 7-8% growth. We tend to go for those companies which have relatively more concentrated portfolios and which have more integrated approaches from technicals to formulations. So we have avoided UPL.

I think today’s fall of 2% is nothing but profit booking or something like that. The stock has been performing quite well in the last few months and so that would be just a trading call.