Auto sector: Past tense and future perfect?

Regardless of the fact that Nifty auto has generated nothing in past five-year period, the tide has now reversed for good. The index currently trades at 15,850 points while it hit a historic low of 4,600 points in March 2020 during the market crash during the onset of pandemic. But the good news is now returning to cheer up the auto investors after the easing of commodity prices (steel and aluminium) and improved kharif prospects.

No wonder then the Indian Nifty auto put up a fantastic performance last week and created a bullish engulfing candle on the weekly chart, indicating a consensus among stock market participants to go in the upward direction.

There is no denying the fact that the auto industry has been facing a crisis for a long time amid supply-chain disruptions, Covid-19 fears, a spike in fuel prices, and a shortage in semiconductor chips.

Over the previous three years, the industry has been pushed by circumstances to raise prices by 25% to 35%. Aside from the high cost of raw materials, it also had to comply with new insurance policy regulations, which required modifications to braking systems and an update to BS-VI emissions standards.

Reversal of trend

The Indian index Nifty Auto, which tracks the shares of automakers, put up a fantastic performance last week and created a bullish engulfing candle on the weekly chart, indicating a consensus among stock market participants to go in the upward direction.

The Nifty Auto index has climbed by 20% since its March lows, making it the sector with the greatest gain overall. This index anticipates advantages from falling commodity prices, particularly those of steel and aluminium, which are important building blocks for autos.

Auto stocks continued their rally for another session on June 28, with the Nifty Auto index gaining 1.25% to 11,832.55 in Tuesday's trade. Out of 15 stocks, 13 stocks ended in the green. Tube Investments remained the top gainer in the index with a 7.41% gain.

The Nifty Auto has gained 28.24 percent from its 52-week low of 9,226.95 points to 11,832.5 points (as of June 28). It rose by almost 1,054 points from the start of the year to 11,832.5 from 10,775. The Index is only 2.5 percent away from its 52-week high of 12,139 as of Tuesday's closing.

Bajaj Auto’s ride

The majority of the equities in the auto index performed satisfactorily, but Bajaj Auto must receive extra attention going forward.

Bajaj Auto, a leading manufacturer of two-wheelers, announced a share buyback programme with a maximum value of ₹2,500 crore, providing ₹4,600 per share for 5.435 million shares, or 1.88 percent of the company's ownership. The buyback price helped lift the share price to ₹3,862 on Monday because it was higher than Friday's closing price of ₹3,812.

Shares of Bajaj Auto closed at ₹3,889.00/share (up 0.72%) on the BSE in Tuesday's trade. The stock gained more than 14 per cent so far in 2022. However, the auto stock has decreased by roughly 7.04 percent over the last one year. The stock rallied 25.99 percent from its 52-week low of 3,027.

The stock is currently trading close to its 52-week high of Rs. 4259.65, which it last attained on June 23, 2021. Using Tuesday's closing price of Rs. 3,889.00, the stock is 9.53 percent away from its 52-week high.

While announcing its earnings for the fourth quarter ended March 31, 2022, Bajaj Auto had said its board also recommended a dividend of ₹140 per share of ₹10 each (1,400 percent) subject to approval of shareholders.

The auto stock is going to turn ex-dividend on Thursday, a day ahead of its record date fixed on July 1, 2022, for the finalisation of eligible shareholders for dividend payment.

Bajaj Auto is a leading manufacturer of motorcycles and three-wheelers in India. Shares of Bajaj Auto have gained over 18% in 2022 (YTD) so far, whereas the auto stock is down about 8% in a year's period.

The last management update, in May, included guidance for significant volume growth, which would be fueled by improving rural demand, encouraging indicators from the marriage market, and positive trends from students. This fiscal year, the introduction of an electric vehicle (EV) and Bajaj-Triumph vehicles with starting prices under ₹2 lakh were anticipated.

Performance of two-wheeler sales

Although two-wheeler sales have been slow since the fiscal year 2018–19 (FY19), Bajaj claimed a positive performance in the fourth quarter of fiscal year 22 (Q4FY22). Although operating revenue decreased by 7% YoY to ₹7,975 crore, higher margins helped to some extent offset the drop in sales volume.

Earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin increased 190 basis points (bps) quarter-over-quarter (QoQ) to 17.1%, while adjusted profit after tax (PAT) increased 10% year-over-year (YoY) to Rs. 1,469 crore.

The two-wheeler market in India was the one most severely affected by the pandemic and has yet to begin to recover. According to data from the Society of Indian Automobile Manufacturers, the segment posted its lowest wholesales in the previous ten years in FY22.

Electric two-wheeler

According to analysts at Jefferies, the share of electric vehicles in all two-wheeler registrations has stayed between 3 and 4% in the April to June period, despite a number of fire accidents and supply-chain issues.

Only 0.15 percent of all two-wheeler registrations in FY20 were electric versions. Despite the fact that their share climbed to 0.35 percent in FY21, their performance in FY22 was significantly higher, coming in at 1.93 percent.

The share of electric two-wheelers maintained steady at 3–4% in April–June after contributing 4.28 % in March, according to Jefferies analysts.

According to analysts, if there is a general two-wheeler market turnaround, Bajaj Auto and the other large participants would undoubtedly benefit from the price movement over the next sessions.