Nifty Auto

India is the fourth largest automobile market in the world after China, the US, and Japan. The automobile sector in India contributes ~8 % of the GDP. The auto sector comprises of 2-wheelers, 3-wheelers, Passenger vehicles & Commercial Vehicles. Since the auto sector is predominantly manufacturing, hence it directly employs close to ~50 Lakhs through auto and auto ancillaries but excluding fuel stations, vehicle repair, and auto insurance agents.

The 10-year average growth rate of the Indian auto sector is ~7-11% depending upon the type of vehicle. Two-wheelers are close to 35% penetrated while passenger vehicles are underpenetrated with just 10% of potential customers. This indicates that the auto sector can provide good growth over the next decade.

The current annual run rate of two-wheelers is 2 Cr in volumes, passenger vehicles clock ~30 lakhs while commercial vehicles and tractors are ~7 lakhs each.

Auto is either a discretionary purchase for users or used for economic purposes. The auto sector tends to be cyclical in nature with periodic down cycles. The sensitivity to the cycle is influenced by the economic activity, interest rate, available financing options, wages/ salary growth, and regulatory environment.

Due to its ticket size, barring 2-wheelers, the rest of the auto sector is very sensitive to change in the overall economic outlook and interest rates. Consumer sentiment plays a key role in the high-cost purchase. Also, the outlook for autos used for commercial purpose depends on general economic activity and future trajectory.

Original Equipment Manufacturers (OEMs) are the biggest players in the auto eco-systems. Naturally, they have an upper hand and more bargaining power over the rest of the players. Examples of OEMs include Maruti Suzuki, Bajaj Auto, etc.

The auto ancillaries are the other part of the ecosystem that are suppliers to these OEMs. There are multiple auto ancillaries manufacturing Tyres, engines, fasteners, forging companies, crankshafts, batteries, etc. Some of the listed auto ancillaries are Motherson Sumi, Sundram Fasteners, Gabriel India, Exide Industries, MRF, etc.

1. Eicher Motors

Eicher Motors is into premium two-wheelers Royal Enfield and Commercial Vehicles and buses. Eicher Motors rebranded the iconic brand Bullet and built a culture of cruiser bikes in India. The company has more than 50% market share in the luxury bike segment. Future growth will come from geographical expansion, spares, and bike upgrades. Commercial vehicles and buses are more cyclical and contribute lower to overall business value.

2. Maruti Suzuki

Maruti Suzuki enjoys market leadership across segments namely PV, UV, and Vans with more than 50% market share. Early mover advantage and wide distribution have helped the company to achieve a large volume in comparison to peers. Large volumes, in turn, have helped the company to maintain a low cost of production versus peers, its primary source of the moat. Lower cost of ownership for the aspirational population ensures the company retains a large market share.

3. Bajaj Auto

Bajaj Auto is the second largest two-wheeler manufacturer and the largest three-wheeler manufacturer in India, with exports to more than 70 countries. The company enjoys a market share of 16% in the domestic motorcycle market and more than 58% in the three-wheeler market. Motorcycles contribute around 84% and three-wheelers contribute around 16% to its total volumes. Strong marketing strategy in premium motorcycle and scale in three-wheeler has helped the company to enjoy high margins and ROE.

The auto industry is cyclical: The Auto sector tends to do well only in times of economic growth, as customers are more likely to buy vehicles in times of economic upswings.

Invest with a margin of safety: Since it is a highly cyclical industry, investors should look at purchasing stocks with a decent margin of safety, to protect them from the downside.

There is no specific index fund or ETF that can give you exposure to the auto sector companies. One idea is to buy specific stocks of auto companies in proportion to their weights in the index like Sensex. Another idea to gain exposure to the auto sector is investing in theme-based mutual funds that specifically invest in select sectors. One such mutual fund we are aware of is UTI Transportation and Logistics Fund.

You can use the MoneyWorks4me Nifty Auto Index Screener for shortlisting the top-performing auto sector companies and look up the auto sector share price of a specific company. For example, using the MoneyWorks4me’s screener we first shortlist the fundamentally strong companies (Identified by the ‘Green’ color code) and then look for companies that have shown a strong profit growth in the last five years. We arrive at the following list of companies:

Nifty auto-share prices are the most attractive when the economy is coming out of recession. However, it can be an extremely daunting task. Even if one is aware of the economic boom and bust cycles, not all auto sector shares are worth buying. You will still need to identify which stocks to buy and at what price? However, it is recommended that investors should consult their advisor before making a decision to invest significantly in a specific sector or industry as it can lead to a risk of overexposure.

MoneyWorks4me can help you identify the best-performing auto sector stocks. The decision-makers allow for simple and effective analysis.

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