Has the Downward Spiral Begun?

Dussehra, also known as Vijayadashami, marks the onset of the festive season in India – a time typically filled with celebration and increased consumption across sectors. Among the beneficiaries of this festive boom, the automotive industry traditionally enjoys robust demand. However, this year, things have taken a surprising turn. The Nifty Auto index has corrected nearly 10 per cent from its record high in September, with a notable sharp decline on Thursday, as Bajaj Auto witnessed a rare double-digit drop – a plunge reminiscent of March 2020.

So, what’s going wrong with automotive stocks? For starters, the much-anticipated festive demand in the first half of the season has fallen short of expectations. Bajaj Auto, a key player, confirmed that the two-wheeler industry saw growth of just 1-2 per cent during the initial phase of the festive season, a stark contrast to the company’s expectation of 5-6 per cent and far below the 8-10 per cent growth forecasted by analysts.

This tepid demand, coupled with an inventory buildup ahead of Q2 earnings, is weighing on the sector. Raw material costs have also eaten into the margins, with Bajaj Auto’s earnings showing the impact of rising input costs. Adding to these concerns, Hyundai Motor India’s much-anticipated IPO, the largest ever in India, is yet to see significant retail investor participation, reflecting lukewarm sentiment. Finally, after a stellar rally in CY 2024, the valuations of automotive stocks are no longer offering much comfort to investors.

Shifting from automotive stocks to broader market dynamics, foreign investors seem to be heading for the exit door. According to NSDL data, foreign portfolio investors (FPIs) have sold equities worth a staggering Rs 67,834 crore in just the first 15 days of October, marking the largest monthly FPI outflow in Indian stock market history, even surpassing the corona virus pandemic-related sell-off in March 2020. However, domestic institutional investors (DIIs) have stepped in to provide much-needed support, injecting Rs 63,981.54 crore into the market during the same period.

This shift from FPI reliance to DII support is significant, but the heavy FPI outflow remains a cause for concern. This brings us to the question that’s top of the mind for every investor: Is the market headed for a collapse? Over the past three years, there have been numerous global events – from the Russian invasion of Ukraine to geopolitical tensions in the Middle East – that have caused investors to fear a market downturn. Yet, despite these shocks, the markets have continued to rise, buoyed by strong corporate earnings.

But this time, things feel different. For the first time in three years, earnings growth is showing signs of fatigue, with margins under pressure. Projections suggest that Nifty 50 earnings per share (EPS) will grow by just 8 per cent in FY25, a steep decline from the over 18 per cent growth in FY23 and FY24. While FY26 estimates currently predict a 15 per cent growth, there’s a risk of further downgrades. In my view, sustained earnings growth, accompanied by margin improvement, is the only reliable factor driving the stock prices.

Other factors might fuel the momentum temporarily, but without the backing of earnings, they fizzle out over time. That said, the market correction we are witnessing might offer a silver lining. The 23,800-24,000 range could serve as a strong support level for Nifty 50. Once the index stabilises around this base, we may see the beginning of a fresh uptrend. In times like these, it’s essential for investors to reassess their equity exposure and adjust their portfolios accordingly.