Quarterly results can often serve as a reality check for investor expectations. The automobile sector provides a prime example. Investors have enthusiastically driven up the Nifty Auto index, even with a persistent slowdown in production and wholesale dispatches for the first nine months of 2024. Retail sales and vehicle registrations had already hinted at a deceleration across automobile segments in September.

Festive hopes dashed

Despite these indicators, investors had pinned their hopes on the festive season. Two-wheelers, showing reasonable growth in wholesale dispatches, were anticipated to lead earnings in Q2 FY25. Bajaj Auto initially seemed to deliver, announcing healthy earnings growth for the September quarter. However, the company subsequently dashed hopes of a robust festive season, triggering a selloff in its stock and a ripple effect across shares of other automobile manufacturers.

During a post-results earnings call, Bajaj Auto’s management indicated that the festive season had begun on a lacklustre note, with sales falling short of expectations. Current projections suggest a modest 3-5 percent sales increase for the overall festive period. For the entire fiscal year FY25, domestic two-wheeler industry growth is now estimated at a mere 5 percent. This is a significant downward revision from pre-Bajaj Auto results, when analysts anticipated double-digit or at least 10 percent growth in two-wheeler sales for FY25.

Reality bites valuations

Bajaj Auto’s revised growth projections appear significantly out of sync with its stock’s rally in 2024 and its prevailing valuations. As noted by Nitin Agrawal and Neha Gupta from the MC Pro Research Team, the stock’s valuation at 31.9 times its projected FY25 earnings appears rather expensive.

While the results of other automobile companies may differ, Bajaj Auto’s commentary points to a tangible weakness in ground-level demand. Two-wheelers are predominantly mass-market products, and the tepid offtake this season contradicts the optimistic investor sentiment fuelled by healthy monsoon rains and anticipated rural demand recovery.

Consumer sentiment sours?

A muted festive season could have a substantial impact on the earnings of automobile companies across all segments. Passenger and commercial vehicle registrations and retail sales had already declined for two consecutive months leading into September 2024. Should festive season sales fail to pick up, the Street’s mid-single-digit growth expectation (4-5 percent) for the passenger vehicle industry may need a downward revision.

This soft demand commentary extends its implications beyond the automobile sector, potentially affecting companies in other consumer goods industries. Lacklustre automobile sales suggest that consumers are tightening their belts on discretionary spending. While Jio Financial Services shares have shown robust year-to-date growth and attract investor interest, the broader market sentiment may be tempered by concerns over consumer demand and spending power.

Will the festive cheer eventually arrive, or is this a sign of deeper demand issues? Investors will be keenly watching sales figures across sectors to gauge the true pulse of the consumer in the coming weeks.