Up 10% in 2023 YTD, Nifty Auto posted double-digit returns every year since 2020; is it time to stop buying?

The Nifty Auto index has continuously been giving double-digit returns for four straight years since 2020 (including 2023 YTD). Nifty Auto is the second best-performing index this year (YTD), up over 10 percent, after the Nifty FMCG index, which has topped the list with over 11 percent gains. Among the reasons are rising consumer demand, easing of chip-shortage issues, price hikes, more launches, and a rise in volumes.

The index advanced 15 percent in 2022, 19 percent in 2021, and 11 percent in 2020 when the world was reeling from the COVID pandemic. However, in 2019, the index lost over 10 percent.

The strong performance of auto stocks in India can be attributed to several key trends.

Suman Bannerjee, CIO of Hedonova, has listed a few factors driving the growth and potential future performance of the auto sector:

Growth Potential: The domestic automotive industry in India is projected to experience growth in the high single-digit range in the coming years. Passenger vehicle, commercial vehicle, two-wheeler, and tractor segments are all expected to see increased demand, indicating a positive outlook for the auto sector.

Government Initiatives: The Indian government has introduced various initiatives and policies to boost the automotive sector. One such initiative is the Production-Linked Incentive (PLI) Scheme, which offers financial incentives to promote domestic manufacturing of advanced automotive technology products. These initiatives aim to attract investments and encourage the sales of locally manufactured vehicles.

Technological Advancement: The focus on electric and autonomous vehicles is growing in India. The government aims to make India a leader in shared mobility with a focus on reducing emissions. The electric vehicle market is expected to witness significant growth, creating new opportunities and potentially generating job growth.

Foreign Investment: The auto sector in India has been attracting both local and foreign investments. The government expects the sector to attract substantial investments in the coming years, indicating confidence and growth potential in the industry.

Considering these trends, the expert advised that investing in auto stocks can be attractive. However, it's important to conduct thorough research, analyze the financial health of individual companies, and consider other factors such as valuation, market conditions, and company-specific developments before making any investment decisions, he cautioned.

Along with Bannerjee, several other market experts also believe that this is a time for a turnaround in the auto space. With the decline in raw material prices, the sales of the auto firms are expected to increase. Also, attractive valuations as well as the robust growth outlook make auto stocks a great ‘buy’ opportunity for investors.

Outlook

Aditya Welekar, Senior Research Analyst at Axis Securities, believes that the recent fall in commodity prices is likely to contribute to the gross margins of the companies in the future. Further, a fall in steel prices will be margin accretive for CVs (commercial vehicles) and PVs (passenger vehicles). The implementation of the scrappage policy from April 23 will also be supportive of the CV off-take volumes in FY24, he added.

In FY24, Welekar expects the 2-wheeler (2W) domestic sales to grow at 6-9 percent over the low base in FY23, as per ICRA. He also sees 2W exports bottoming out over the next few quarters as the macro headwinds subside in the future.

"Going forward, all the Auto segments PV/2W/CV are expected to register a positive growth momentum in FY24, but the growth will see moderation over the strong growth witnessed in FY23. Rural recovery and export pickup will be key watch points. Failure of pick up in exports and rural demand coupled with high vehicle prices will be critical headwinds for auto stocks," he said. Ashok Leyland in CV, Maruti in PV and TVS, and Eicher in 2W are his top picks in the auto space.

However, post the recent rally, the market has partially rewarded the stocks, and the expert has advised sticking with the "Buy on Dips" strategy.

Vinit Bolinjkar- Head of Research - Ventura Securities, noted that it is anticipated that the upswing in the commercial vehicle (CV) sector will continue for the next 3-4 years, presenting a favorable opportunity for Tata Motors, Ashok Leyland, and Eicher Motors.

As per the expert, a shift in consumer preferences from small to mid-sized cars toward utility vehicles (UVs) is contributing to the overall growth of the PV market, which will be particularly benefiting Maruti Suzuki due to its changing product mix which is likely to improve its revenue growth and profitability in the coming years. The company is also planning to launch EV variants of its existing products in 2024 to gain market share in the EV space, he added.

Furthermore, he also noted that there has been a notable change in consumer preferences in the 2W industry in India, with a shift from entry-level motorcycles with lower engine capacities to mid-to-premium range motorcycles with higher engine capacities. According to Bolinjkar, Eicher Motors, with its strong presence in the higher engine capacity segment, remains unaffected by the disruption caused by EVs and is gaining traction in the market. The company is also developing an EV in the higher capacity segment, and it is likely to be launched in FY25, he stated.

Saji John, Research analyst at Geojit Financial Services, pointed out that auto companies have registered robust growth, especially in passenger vehicles, which reached a record 3.9 million units in the last fiscal year ending on 31 March, 2023 and this can be attributed to high demand from the urban class, new launches, and pent-up demand. Moreover, the CV cycle should continue to perform well due to channel inventory correction, however, the overall 2W sales came below expectations due to the rising cost of the vehicle, sluggish exports, and lower rural participation and disposal income, he said.

His top picks for the sector are Eicher Motor, Ashok Leyland, TVS Motor, and M&M.

According to Deepak Jasani, Head of Retail Research, HDFC Securities, “part of the recent outperformance of the automobile companies could be attributed to pent-up demand which has been elongated due to semiconductor shortages and pass-thorough of inflation in a softening raw material prices environment. With long waiting periods for most of the models, discounts/freebies offered by most of the OEMs have been negligible. Additionally, India is emerging as an export hub and many OEMs have capacity expansion plans. We expect the trend to continue for the next few quarters as the backlog gets cleared. Interest rates seem to have peaked out and falling rates could have a positive impact on automobile demand”. His top picks from the sector are Maruti Suzuki and M&M.

Abhishek Gaoshinde, Deputy Vice President Research at Sharekhan by BNP Paribas, forecasted that going forward, the performance of auto stocks would be more driven by margin expansion in FY24 than volume growth.

While the volume growth would moderate in FY24 due to the high base, the analyst believes that the operating performance would be better on account of rising premiumization across the category, better product mix, gradual improvement in the supply chain and RM cost tailwind. His top picks in this space are Tata Motors, Apollo Tyres, Ramkrishna Forgings, Hero Motocorp, Exide Industries and Maruti Suzuki.

Finally, Parul Rao, Research Analyst, SAMCO Securities, believes that India is at the beginning of a new chapter for the auto industry. The path ahead is fruitful, thanks to the mega-transformation of the industry as a whole, be it electric vehicles or the increasing love for SUVs. The companies are re-writing the story to stay ahead in the game, she said.

Investors can keep an eye on stocks like Eicher Motors, Ashok Leyland, and Tata Motors, according to Rao.

Meanwhile, as per Bannerjee of Hedenova, the top three auto stocks for 2023 would be: Maruti Suzuki, Mahindra and Mahindra, and Hero MotoCorp.