BackAuto stocks rise 25% in a year - what is driving the gains and what should investors do?
Auto stocks have seen significant gains in the past year, with the Nifty Auto index rising 25 per cent. Factors such as pent-up demand, economic recovery, and the easing of chip shortages have contributed to the rise.
PremiumThe last one year's gains in many auto stocks have made investors significantly rich. The Nifty Auto index has gained about 25 per cent in the last one year with some of its components such as Tube Investments of India surging as much as 62 per cent. Equity benchmark Nifty50 has gained 21 per cent in the same period
Stocks like TVS Motor Company (54 per cent), Tata Motors (38 per cent), Bharat Forge (35 per cent), Mahindra and Mahindra (30 per cent), MRF (28 per cent) and Bajaj Auto (24 per cent) have outperformed the benchmark Nifty in the last one year.
The auto index has strongly outperformed the benchmark index by rising 23 per cent this year. The Nifty50 is up about 9 per cent year-to-date.
Why are auto stocks rising?
Experts attribute the rise in auto stocks to several factors, including the pent-up demand after the pandemic, economic recovery and the easing of chip shortage.
Sneha Poddar, AVP - Retail Research of Broking & Distribution at Motilal Oswal Financial Services pointed out that the demand recovery is sustaining across segments such as passenger vehicles (PVs), commercial vehicles (CVs) and two-wheelers (2Ws). Exports, too, seem to have largely bottomed out, though recovery may be gradual.
Poddar said that the commodity cost continues to soften which would result in margin expansion. Even monsoon which was a concerning factor at the start of June was put to rest towards the end as the rainfall deficit turned into surplus.
Aamar Deo Singh, Head - Advisory at Angel One underscored that the consumption story with regard to automobiles in India is here to stay amid expected growth in GDP over the next decade.
"The shift towards alternative fuels, predominantly electric vehicles (EVs), continues to play a significant role in driving growth. Further, across-the-board rallies in auto stocks, ranging from two-wheelers to commercial vehicles, also provided a strong base. Going forward, RBI policy towards interest rates is going to be crucial, coupled with monsoon; they are going to play a crucial role in containing inflation, which has the potential to impact auto sales going forward," said Singh.
Deepak Jasani, Head of Retail Research at HDFC Securities highlighted the auto sector was witnessing a de-growth since achieving its highs in 2019, which was aggravated during the Covid pandemic.
Post the pandemic, there has been a sharp pick-up in economic activity, Jasani said, adding that chip shortages due to supply constraints also impacted supplies by auto manufacturers.
"Once the chip shortage eased, the resultant pent-up demand was supported by aspiring consumers who were seeking their own means of transportation. Interest rates were low and financing was available easily as lenders were looking to grow their books," said Jasani.
What should investors do with auto stocks?
Analysts suggest investors can continue holding on to auto stocks as the sector would be one of the key drivers for Q1FY24 earnings.
"Its earnings are expected to surge by 11 times year-on-year (YoY) during the quarter on a low base. Even going ahead with good progress on monsoon and better crop prices, the demand is expected to remain healthy. Further with the benign commodity cost, margins would continue to improve. Thus in lieu of this, the valuation seems attractive as the sector trades at about 22 times the price-to-earnings (PE) ratio which is below its long-period average of about 27 times," said Poddar.
Poddar suggests one can look at Tata Motors and Ashok Leyland among auto original equipment manufacturers (OEMs) as they are expected to report very strong numbers in Q1.
"Despite the pre-buy impact seen in Q4FY23, before BS6 phase-II implementation from April onwards, CV volumes in Q1 grew about 4 per cent YoY for Ashok Leyland. In the case of Tata Motors, JLR volumes continue to grow strongly, due to easing chip shortages and continued traction toward new models. Even its domestic business now has much better visibility which makes us confident about its growth prospects," said Poddar.
Singh of Angel One advises investors to adopt a two-pronged strategy.
"On one hand, they can look at booking part profits whereas on the other hand, they can trail the remaining part of their auto portfolio as the current bull run continues on its onward journey. At the same time, investors also need to be prepared to witness heightened volatility, as the market when trading at record levels, tends to exhibit such behaviour. For fresh entries, one should look for a meaningful correction, before initiating a new position," said Singh.
"At current levels, one needs to be slightly cautious in auto stocks, given the spectacular returns generated over the past couple of years. But one can accumulate or plan a stock SIP after decent corrections in stocks like Tata Motors, Mahindra & Mahindra and Maruti, given the long-term growth potential of these companies," said Singh.
Jasani said while the growth witnessed in the past couple of years is unlikely to be repeated in the near term, investors with a long-term horizon can hold on to top stocks.
"India is emerging as an export hub for many OEMs and besides domestic growth, export growth is expected to be strong. After a period of consolidation or slowing of growth rates, we could once again see the sector showing accelerated growth after a few quarters," said Jasani.
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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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