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

The auto industry has been struggling to grow for over 10 years. The various sub-segments of the industry saw a CAGR increase of only 3-6% between FY10 and FY20, compared to 10-12% CAGR between FY00 and FY10. The growth of the industry has been affected as the fate of the automobile industry is closely linked to the growth rate of the economy.

• All divisions in FY10 and FY11 have increased due to government measures announced to help recover from the 2008 global financial crisis.

• In FY12-14, high interest rates and high fuel prices and inflation dampen business sentiment leading to recession.

• FY15-18 Consumer sentiment has improved due to the appointment of a stable government. The government has placed great emphasis on manufacturing and introduced favorable policy decisions, including a focus on ease of doing business, financial stability and managing inflation.

• In FY19, PV sales were affected by regulatory changes, rising interest rates and higher fuel prices. The FY20 has led to economic downturn in India as well as globally due to protectionist measures initiated by various countries. FY21 was a cowardly affected year.

(Source: Annual Report, Equity Capital)

To make an outsourced return, the best time to invest is when a sector is not favorable and valuation is low. The auto sector currently contributes only 5% of the total market cap, which is consistent with its long-term average. However, we have seen in the past that this sector tends to go up to 9% of the total market cap with economic growth.

India’s GDP growth is expected to exceed 7% to reach the ambitious goal of becoming the $ 5 trillion economy set by the Indian government. This means that 9% of the total market capitalization of the auto industry should also lead to a growing contribution which should create substantial value in a period of 2 to 3 years.

Demand pick-up speed
Maruti Suzuki, India’s leading 4-wheeler company, said it was seeing strong demand for search and booking, but due to supply-like issues, many bookings have been postponed. Semiconductor supply and commodity inflation remain the only challenges. Looking at the waiting time for many models it is clear that car demand is not a challenge. Some models like the Mahindra XUV700 have a waiting period of 88-90 weeks and the Mahindra Thar has a waiting period of 43-44 weeks. Also, the waiting period of Tata Motors Nexon EV is 12-16 weeks and that of Tata Punch is 12 weeks.

Demand for commercial vehicles is expected to increase as the project progresses. The government’s continued focus on infrastructure spending has led to an increase in demand for commercial vehicles. The demand for replacement will be further increased as fleet owners will now want to replace their old trucks. It is important to note that rural demand has not yet increased and this will be an important observable factor for overall recovery.

Contributing to the growth of export opportunities
Major passenger vehicle and 2-wheeler companies have increased their exports mainly due to demand from Latin America, Africa and Southeast Asia. In addition to the above, global players are looking to India for sourcing parts and components as part of their China +1 strategy. We are already seeing prominent companies like Case New Holland Industrial, the world’s fourth largest tractor manufacturer, seeking to triple the parts and components from India in the next three years at a cost of over $ 300 million.

The current hurdle is giving investment opportunities from a long-term perspective
Due to supply constraints ranging from the availability of semiconductor chips to rising raw material prices, the auto industry may be under pressure for a few quarters, but these quarters could lend an opportunity to investors with long-term horizons.

Bottom-up investors are always looking for companies that are not only able to keep their heads above water during a recession but also provide tremendous growth. These types of companies, which manage to get through a bad time, end up firing on all cylinders as soon as the cycle starts.

In particular, investors should look for companies that have different product offerings and meet different sub-segments of the industry with a focus on export and replacement markets.

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