Tax cuts not enough to lift sentiment on Auto Sharp cuts in the estimated earnings of auto companies are expected despite the recent corporate tax cut. Downgrading Maruti Suzuki to hold after the recent run up in share price, the auto sector is still in the middle of a down-cycle, which have lasted an average of 7-11 quarters. M&M is its top pick among auto stocks. Here's why more earnings cuts in the auto space is expected. High operating leverage amplifies the impact of weaker-than-expected volumes. There is cut in earnings estimates across its coverage by 1-49%, and its estimates for the year are now 4-58% below consensus. With inventory levels still high ahead of BS-6 transition in April, 2020, wholesale volumes will remain muted in the second half even assuming a reasonable festive season on retail basis. Down-cycle in the auto industry is currently in its third quarter for tractors and light commercial vehicles (LCVs), and in the fourth for medium and heavy commercial vehicles ( MHCVs) and two wheelers. Historically, downcycles have lasted an average of 7-11 quarters but a wide range of 4-23 quarters means timing of the recovery can be tricky. It remains on the lookout for signs of a turnaround given the stage of the downcycle. However, channel checks with dealers do not indicate any recovery yet even in retails, though much of the festive season is still ahead and the next few weeks could be crucial. Major government policy measures such as cut in personal income tax could also trigger a recovery. The recent run up of 25% in Maruti Suzuki India's stock from July lows and stretched valuation as a result of that leave room for limited upside to its price target. It has lowered price target on the stock to ₹7,000 from ₹7,100. It would wait for better entry points or for better visibility of a sharp recovery. The brokerage has retained its buy rating on Mahindra & Mahindra given the inexpensive valuation and no BS-6 impact in tractors.