Investors shun auto stocks

Tue, 23 Feb 01:30 pm

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Though trading in the positive, the Indian markets witnessed some volatility as alternate bouts of buying and selling were witnessed during the previous two hours of trade. The overall market sentiment is negative as the decline to advance ratio is poised at 2 to 1 on the BSE. While stocks from the banking, healthcare and metal spaces are seeing some interests, those from the auto and FMCG spaces are witnessing selling pressure.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 50 points and 15 points respectively. Stocks from the midcap and smallcap spaces are however, trading in the red, with the BSE-Midcap and the BSE-Smallcap indices down by about 0.4% and 0.6% respectively. The rupee is trading at 46.08 to the US dollar.

FMCG stocks are currently trading firm led by Tata Coffee, Nestle, Britannia and ITC. The pressure on the stock of Nestle is witnessed today on the back of its below expectation financial performance during the latest quarter. While the company reported a strong topline growth of 24% YoY during the quarter, net profits fell by about 7% YoY. This dismal performance at the bottomline level was on account of poor operating numbers. The company's operating margins dropped by 4.5% YoY and stood at 14.7% during the quarter ending December 2009. This was on the back of higher raw material prices, increase in advertisement expenditure and staff costs. However, it seems as the company has taken measures to improve its operational performance going forward.

A leading business daily has reported that Nestle has upped the prices of some of its key products over the past few weeks. Prices of various products such as chocolates, milk products, and dairy whiteners have been increased by about 5% to 20%. It should be noted that the Indian consumers are very price point sensitive. Hence, this move needs to be closely monitored as this may signal the start of price increases across the board by FMCG companies to combat rising food prices.

Auto stocks are currently trading weak led by Ashok Leyland, TVS Motors, Maruti Suzuki and Bajaj Auto. A leading business daily has reported that commercial vehicle manufacturers such as Tata Motors and Ashok Leyland are likely to face some pressure in the coming months. This is on the back of the government imposing a stiff anti-dumping duty (making tyres costlier by about Rs 3,000 to Rs 4,000 per pair) on imported tyres. It may be noted that due to the tyre demand-supply mismatch in India as well as cheaper rates of imported tyres, leading original equipment manufacturers (OEMs) have been sourcing their tyre requirements through imports. Also, a business daily had recently reported that commercial vehicles manufacturers had cut down production on the back of shortage of radial tyres in India. Now, to add to this woe, the OEMs are likely to see some pressure on costs, unless they resort to passing on the higher costs to their customers. The same may not be such an easy task.