Analysts are hopeful of a recovery in the auto sector, which recorded its worst sales decline in two decades in 2019, in the second half of 2020-21.

The forecast comes amid upcoming headwinds such as the implementation of BS-VI which could lead to price hikes of up to 10 per cent, thereby affecting sales growth.

Numbers released by the Society of Indian Automobile Manufacturers recently showed that all vehicle segments reported a deceleration in 2019 as low consumer sentiments, weak rural demand and economic slowdown impacted demand. It further showed that overall sales of vehicles across categories, including passenger cars, two-wheelers and commercial vehicles, fell 13.77 per cent in 2019.

While observers point out that the sector’s revival will depend on the course of the domestic economy, some expect a recovery from the second half of 2020-21.

“After 12 months of dwindling demand, we are seeing initial signs of green shoots from the ground. Although the upcoming BS-VI transition could lead to a volatility in volumes, we are hopeful of a ‘business as usual’ scenario from the second half of 2020-21,” a recent report from Motilal Oswal Institutional Equities said.

Its anlaysts pointed out that while the volume decline has been arrested in two-wheelers, passenger vehicles and tractors are sending some positive signals too. Moreover, though commercial vehicles face excess capacity, there are visible greenshoots in the form of an improvement in inquiries.

“Initial signs of rural sector bottoming out are emerging as indicated by the return of food inflation, favourable terms of trade for farmers, multi-year-high rural spending by the Centre, the unusually good water reservoir levels and the good start to the Rabi season. Given the possibility of volume stabilisation and recovery, 2020-21 could see a sharp earnings recovery,” they added.

The brokerage is recommending investors to focus on companies offering higher probability of volume recovery and high operating leverage.

Though auto companies are expected to report tepid numbers for the third quarter ended December 31, 2019, observers feel some of them could see an expansion in their margins because of a low base, soft commodity prices and other cost optimisation efforts taken by the companies.

“After enduring tough times over the past five quarters, the auto sales cycle should see a gradual improvement on better rural sentiment, lower interest rates, improvement in the macro environment and the likely implementation of a scrappage policy,” analysts at Emkay Research said.