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Auto sell off: Is diesel consumption the culprit?

Auto stocks tumbled today inspite of good sales volumes reported in February, even as markets witnessed a broad sell off. The main reason for the sell off in the broader market was:

• Tech sell off at NASDAQ the night before. There are renewed concerns that India’s tech bellwether Infosys may announce lower guidance for FY03 when it announces its 4QFY02 results.

• The second reason for the sell off was continuing political uncertainty. Due to the lack of any major positive trigger, the market caught jitters due to the assault by NDA allies and the Opposition on the BJP/ Central government. The BJPs handling of the Gujarat riots and Ayodhya situation coupled with the utterances of VHP and RSS leaves a lot to be desired.

• Finance Minister has started rolling back many of his budget proposals. If LPG subsidy can again be hiked, the urea price hike will also be rolled back, feel the skeptics.

The decline in markets was expected by us (Read our India Market Strategy: Time for caution dated 12 March 2002). To come back to the auto stocks, we took a quick look at their last one week’s performance. Except LML and TVS, all other major auto stocks declined by 2-12%. Heavyweight Tata Engg lost 6%. In fact Tata Engg lost Rs7 in one day to close at Rs 121.65 on Thursday. Ashok Leyland lost a massive 12%, mainly due to its poor sales volumes. A leading auto analyst said that the decline in auto stocks in the markets today was led by reports of poor growth in diesel consumption. We analyzed the data for the month of February – POL product consumption declined by 3.9% yoy during the month of February. This was led by a 9.7% yoy decline in naphtha consumption and 7.8% yoy decline in diesel consumption.

The continuing decline in POL product consumption is indicative of the slowdown in the Indian manufacturing sector. The fall in diesel consumption is also a cause for concern. How much diesel is consumed by the road transport sector? According to estimates available, road transport alone accounts for 76% of diesel consumption and 55% of diesel is sold through highway petrol pumps. For diesel consumption to decline by 7.8% yoy, the offtake from road transport sector must have declined significantly. But it is possible that diesel consumption in road transport would have come to a standstill in parts of the country due to the riots in Gujarat (28^th of February onwards). There have been reports of more than 1000 trucks being burnt. If this hypothesis is correct then it means that diesel consumption would be much lower in March and sometime down the line truck sales should improve. That should be positive for Tata Engg and Ashok Leyland, right? I am still not sure why diesel consumption fell so sharply in February – or is it a case of inventory adjustments?

My guess is that truck sales will come out strong in March. For Tata Engg car sales may be marginally affected as Gujarat is a large market in the Western region, according to one company official. So use the opportunity and the negative sentiments to get into Tata Engineering.

Courtesy : India Infoline

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