Three Auto Stocks To Watch Out For

  • Stock Market Analysis
  • Editors Pick

The Importance of the Automobile Industry and its Growth Prospects
 
The automobile industry accounts for roughly half of India's manufacturing GDP and 7.1% of total GDP. Many other industries like oil, iron, rubber, steel, glass, and so on, rely on the automobile and auto component sector. The tyre and auto ancillary industries are highly dependent on the original equipment manufacturers (OEMs). OEMs or the replacement market drive the majority of demand for these industries. The automotive industry accounts for approximately 15% of total tax collections in India. This demonstrates why the automobile industry is critical to the health of the economy. 
 
India is the world's fourth-largest automobile market by volume, after China, the US, and Japan. Car penetration in India is currently 28 per 1000 inhabitants, compared to 180 in China and over 800 in the United States, indicating huge growth prospects for the sector in the long term.
 
The two-wheeler segment dominates the Indian automobile market in terms of volume because of its young and growing middle-class population. Small and mid-sized cars dominated the passenger car segment.
 
The Indian automobile industry benefits from a variety of factors, including the availability of low-cost steel production, low-cost skilled labour, and strong R&D. 
 
With the introduction of the voluntary vehicle scrappage policy in Budget 2021, the auto industry gains hope. Private vehicles over the age of 20 and commercial vehicles over the age of 15 are required to undergo a fitness test under the policy. In addition, a green tax charge at the time of fitness renewal will disincentivize the use of older vehicles. Overall, the automobile industry has a promising long-term future.
 
Factors to consider before picking Automobile stocks
 
The automobile industry is a highly cyclical industry, which means that during an economic boom, automakers can grow their volumes at a rapid pace, whereas volumes suffer during an economic downturn. This is because discretionary expenses like the purchase of a car or 2-wheeler are easier to cut from a consumer's budget during difficult times.
 
Before investing in automobile stocks, one should be aware of the industry's cyclical nature and avoid being caught at the end of the cycle. Investors should also consider how companies deal with cyclicality and reduce volatility. 
 
Aside from that, investors should look for fundamentally sound automobile stocks, a proven track record, good management, and have strong balance sheets. Companies should have a clear path to growth and the ability to recover quickly from downturns.
 
Hero MotoCorp (NS: HROM ) Ltd 
 
For the 18th year in a row, Hero MotoCorp has maintained its position as the world's largest two-wheeler manufacturer. The company has a strong presence in rural India and is a market leader in the entry and deluxe motorcycle segments. 
 
Through strategic investment in the electric two-wheeler manufacturer ‘Ather Energy,' it has expanded its product portfolio by entering the premium motorcycle, and electric vehicle segments. It has partnered with Harley-Davidson to develop and sell a variety of premium motorcycles, accessories, and general merchandise.
 
Hero MotoCorp has successfully given outstanding return ratios, with ROCEs exceeding 25% and a strong balance sheet with negligible debt and strong free cash flows. It had recently hit a 52-week low of Rs. 2,636. It is currently available at attractive valuations, with a PE of 17.9 compared to the industry PE of 32.7.
 
Looking at the negatives for the company, it is heavily reliant on the domestic market. Despite its presence in over 40 countries, exports account for only 3.3% of its sales. The company has historically had lower sales growth than its peers and faces intense competition, but Hero was the least affected by the COVID-19 pandemic due to its strong rural presence. In the first wave of the virus, rural India was less affected than urban areas. It has recovered the quickest, with positive growth in farming and agriculture segments aided by a good monsoon and a robust Rabi crop.

 Hero Share Price

Escorts (NS: ESCO ) Ltd 
 
Escorts is a manufacturer of agricultural tractors, agricultural tractor engines, construction, earthmoving, and material handling equipment. The stock PE is 19.4, while the industry PE is 21.9. The company is almost debt-free and has a healthy ROE of 19.7%. Tractor sales increased 42.9% to 25,935 units in the first quarter of FY22, compared to 18,150 tractors sold in the same period last fiscal.
 
Escorts anticipates double-digit growth in tractor sales in 2021-22, following a strong first-quarter performance. Despite the uneven distribution of monsoon in its strong markets of the country's north and east, the company is confident that it will be able to maintain its growth momentum. The tractor industry is expanding rapidly, owing to a favourable monsoon, stable crop prices, and increased rabi output, which will benefit the company's sales. However, it anticipates a slowdown for a short period as a result of rising commodity prices, which will result in higher tractor prices.
 Escorts Share Price

Balkrishna Industries (NS: BLKI ) Ltd 
 
Balkrishna Industries is an Indian multinational tyre manufacturing company. It makes off-road tyres for use in industries such as gardening, mining, agriculture, and earthmoving. It was ranked 41st among the world's tyre manufacturers in 2013. 
 
In order to improve brand recognition, the company has launched several initiatives across its markets. It is the official tyre manufacturer for MONSTER JAM in the United States. It is also an official partner/title sponsor of numerous sports in India, Canada, Spain, Italy, and France. The company has relatively high pricing power and can withstand competitive pressure, which serves as a great moat for the company's equity shareholders.
 
The stock PE is 34.5, compared to the industry PE of 14.8. The company is slightly overvalued currently. It has delivered a good ROE of 19.7%. The key export markets have reported strong demand trends for the company. It reported 91.26% growth in total revenues YOY for the June-21 quarter. Net profit for the Jun-21 quarter was up 151%, and this came largely on the back of higher sales revenues. The raw material costs, like in the case of most auto and auto component companies, more than doubled due to commodity inflation.
Balkrishna Share Price

Challenges of Automobile Industry 

 
The disruptive impact of technology, changing customer needs, and major regulatory reforms have all taken centre stage in the automotive ecosystem in recent years. To meet changing customer demand, businesses are under increasing pressure to develop, upgrade, and successfully launch new and innovative products. In recent years, the automobile industry has struggled with mandatory insurance coverage and the BS-VI transition, which has caused the cost of vehicle ownership to skyrocket. Concerns about climate change and sustainability have increased the demand for alternative energy, such as electric vehicles. The Covid-19 pandemic is an additional challenge for the industry.
 
Advice for Retail Investors
 
These newly emerging trends are putting the automobile industry's ability to grow to the test. To remain relevant, businesses must be fundamentally strong and capable. The above-mentioned businesses have adapted to and overcome numerous disruptions, and they can be counted on to do so in the future as well. 
 
ETFs can be an alternative, but India currently does not have an ETF tracking the auto index (Nippon India AMC has filed papers with SEBI for this ETF)
 
While ETFs offer a low-cost method to gain exposure to stocks, the construction of Nifty Auto Index needs to be better. These sectoral ETFs don’t even have a proven track record when it comes to liquidity and tracking error.  
 
If investors fear the liquidity and tracking error of these sectoral ETFs, active mutual funds can be another option to invest in auto stocks through the sectoral fund route.
 
Disclaimer: Team Tavaga does not have any relationship with the above-mentioned AMCs. The above analysis is only for educational purposes. Kindly do not treat this as a recommendation to buy/sell the stock. Consult a SEBI Registered Investment Adviser before investing. Do not rely on unqualified stock tips for investing your hard-earned money.

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