Why auto stocks may be the best bet for the next 2-3 years

The automotive industry has been out of breath for over 10 years now. The various industry sub-segments only grew at a CAGR of 3-6% between FY10 and FY20, compared to a CAGR of 10-12% between FY00 and FY10. Industry growth has been affected as the fortunes of the auto industry are closely tied to the growth rate of the economy.
  • All segments recorded growth in FY10 and FY11 due to government measures announced to help recovery from the 2008 global financial crisis.
  • In fiscal years 2012 to 2014, high interest rates and high fuel prices, coupled with inflation, dampened business confidence, leading to a slowdown.
  • The 2015-2018 fiscal years saw an improvement in customer confidence with the appointment of a stable government. The government has emphasized the manufacturing industry and introduced favorable policy decisions while emphasizing ease of doing business, fiscal stability and inflation management.
  • During FY19, PV sales were impacted by regulatory changes, rising interest rates and high fuel prices. Fiscal 2020 witnessed an economic downturn globally as well as in India due to protectionist measures introduced by various countries. FY21 was a year impacted by Covid.

Year Growth GDP growth Year Growth GDP growth
PV 2W resume PV 2W resume
FY10 26.00% 24.00% 38.00% 7.40% EX16 7.30% -0.40% 12.00% 7.60%
EX11 29.00% 24.00% 27.00% 8.50% EX17 9.20% 3.70% 4.00% 7.00%
EX12 4.70% 13.00% 18.00% 6.20% EX18 7.90% 13.70% 28.00% 7.20%
EX13 2.20% 0.10% -2.00% 4.50% FY19 2.70% 6.34% 18.00% 6.80%
EX14 -6.00% 3.90% -20.00% 4.70% FY20 -18.00% -18.00% -28.00% 5.00%
EX15 3.90% 2.50% -3.00% 7.20% FY21 -2.24% -10.70% -21.00% -7.30%

(Source: Annual Reports, Equitree Capital)

For outsized returns, the best time to invest is when a sector is losing momentum and valuations are low. Currently, the automotive sector only contributes about 5% of total market capitalization, which is in line with its long-term averages. However, we have seen in the past that as economic growth materializes, the sector tends to reach 9% of the total market cap.

AND CONTRIBUTORS

India’s GDP growth is expected to increase by more than 7% to meet the ambitious goal of becoming a $5 trillion economy established by the Indian government. This implies that the automotive industry should also generate a cumulative contribution of 9% of the total market capitalization, creating substantial value over a period of 2 to 3 years.

Demand picking rate
India’s leading 4-wheeler company, Maruti Suzuki, said it was seeing strong demand in terms of inquiries and bookings, but due to supply issues, many bookings have become on hold. The only remaining challenge is semiconductor supply and raw material inflation. Looking at the waiting period for many models, it is obvious that the demand for cars is not a challenge. Some models like Mahindra XUV700 have a waiting period of 88-90 weeks while Mahindra Thar has a waiting period of 43-44 weeks. Also, Tata Motors Nexon EV has a waiting period of 12-16 weeks while Tata Punch has a waiting period of 12 weeks.

Demand for commercial vehicles is expected to increase as projects ramp up. The government’s continued focus on infrastructure spending is driving an increase in demand for commercial vehicles. Demand will be further driven by replacement demand as fleet owners now look to replace their aging trucks. It is important to note that rural demand has not yet recovered and will be a key controllable factor for the overall recovery.

Export opportunity contributing to growth
Large companies in passenger vehicles and two-wheelers saw their exports increase mainly due to demand from Latin America, Africa and Southeast Asia. In addition to the above, global players are looking to India for parts and components sourcing as part of their China+1 strategy. We are already seeing leading companies like Case New Holland Industrial, the world’s fourth largest tractor manufacturer, seek to triple the sourcing of parts and components from India in terms of value to over $300 million. over the next three years.

Current disruption giving opportunity to invest with a long-term perspective
Due to supply-side constraints, from the availability of semiconductor chips to the price increases of key raw materials, the automotive industry could remain under pressure for a few quarters, but these quarters could also present an opportunity for investors. with a longer term horizon.

Bottom-up investors are always looking for companies that have not only managed to keep their heads above water during the downturn, but have also achieved supernormal growth. Companies like these that manage to outperform during downturns end up firing full throttle once the cycle picks up.

Specifically, investors should look for companies that have diverse product offerings and cater to various industry sub-segments while emphasizing the export and replacement market.

(Pawan Bharaddia, is Co-founder, Equitree Capital)
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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