Automobile Sector: Poised For Rapid Acceleration

Special Feature On Automobile Sector 

In the post-pandemic rebound, shares of major automobile companies are outperforming the benchmark indices as the sector is expecting another month of robust car and commercial vehicle sales. Also, the increasing demand for electric vehicles will further boost the sector. In this article, Shreya Chaware has thrown some light on the key points underpinning the growth of the automobile sector 

India’s annual production of automobiles in FY21 was 22.65 million vehicles and 13 million vehicles were produced between April-October 2021. The two-wheeler segment dominates the market in terms of volume owing to a growing middle class and a huge percentage of India’s population being young. Moreover, the increasing inclination of the companies in exploring the rural markets further aided the growth of the sector. The automobile industry can be said as one of the biggest strengths of the country with a turnover of ₹7.5 lakh crore, exports of ₹3.5 lakh crore, a GDP contribution of 7.1 per cent and manufacturing GDP of 49 per cent.

It also offers employment scope for over 4.5 crore people. India holds a strong position in the international heavy vehicle space as it is the largest tractor manufacturer, second-largest bus manufacturer and the third-largest heavy truck manufacturer in the world. India is also a prominent automobile exporter and has strong export growth expectations for the near future. In addition, several initiatives by the Government of India and major automobile players in the Indian market are expected to make India one of the leaders in the two-wheeler and fourwheeler markets in the future. 

Market Size

Two-wheelers and passenger vehicles dominate the domestic Indian automotive market. Passenger car sales are dominated by small and mid-sized cars. In the calendar year 2021, growth was witnessed in all the segments and total sales improved by 5.8 per cent to 18.49 million units compared to 17.47 million units in January-December 2020. Sales of passenger vehicles grew by 26.6 per cent to 3.08 million units from 2.43 million units in CY20. Meanwhile, the total number of commercial cars sold was 677,119, up 34 per cent from 505,102 in the previous year. On the other hand, in FY21, the total passenger vehicles’ production reached 22.65 million vehicles. 

Two-wheelers and passenger cars accounted for 81.21 per cent and 14.56 per cent market share, respectively, accounting for a combined sale of over 17.8 million vehicles in FY21. As per the numbers released by the Society of Indian Automobile Manufacturers (SIAM), in FY22, production in the automobile industry was recorded to be 22,933,230 vehicles as against 22,655,609 units in FY21. This figure includes passenger vehicles, commercial vehicles, three-wheelers, two-wheelers and quadricycles produced in the period between April 2021 and March 2022. In FY22, on the domestic sales front, except for passenger cars and two-wheelers, all the segments posted growth in sales figures. 

Financial Performance

In the past few quarters, the automobile sector has had a tough time owing to rising costs on the back of increasing prices, volatility of commodity prices and supply chain issues in fuel prices. The automotive OEM space has seen a contraction of gross margins by 300-500 basis points in the past four quarters as a result of unfavourable inflation related to raw materials. As per Bloomberg, in the fourth quarter of 2022, on a YoY basis, the aggregate EBITDA of the BSE Auto index squeezed 14.2 per cent which can be attributed to the soaring prices of commodities like steel, aluminium and copper. Also, the international prices jumped 5-25 per cent. 

The rise in operating costs has dented the operating margins of the companies whereas the issues relating to supply chains stretched the waiting period for vehicles and discouraged consumer sentiment. According to Care Edge Research, in May 2022, sales in the domestic automobile industry improved 6.9 per cent on a month-on-month basis due to higher demand. The sales showed a massive improvement on a YoY basis which can be due to the substantial effect of the pandemic on the corresponding period of the previous fiscal. 

In FY22, Maruti Suzuki India showed 19.08 per cent improvement in net sales over FY21. Meanwhile, PAT and operating profit declined 11.91 per cent and 10.10 per cent. EPS de-grew by 11.61 per cent. The company is likely to benefit from strong domestic PV demand, traction in exports, expansion of portfolio of products and network extension. In the same period, Tata Motors’ net sales grew by 10.18 per cent whereas operating profit declined 20.49 per cent. The company’s future performance is likely to be underpinned by strong global retail demand and impressive order book. The cost saving initiatives by the company are likely to help margin growth whereas robust free cash flow will help in improving the balance-sheet. Mahindra and Mahindra, a diversified automobile company in India, on a YoY basis, posted a decent rise in net sales along with a handsome growth in PAT and operating profits. EPS also grew by an attractive number. The company’s performance will be driven by the aggressive electric vehicle launch in the pipeline, which will in turn help with the improvement of volumes. 

Performance in Equity Market

In the post-pandemic rebound, shares of major automobile companies are outperforming the benchmark indices as the sector is expecting another month of robust car and commercial vehicle sales. In the past month, the BSE Auto index has gained 6.83 per cent against a 1.52 per cent fall in the Sensex whereas on an YTD basis, the BSE Auto index zoomed 10.4 per cent as compared to a 7.94 per cent decline in the Sensex. As many as nine out of 15 stocks in the BSE Auto index were able to outperform the benchmark index, zooming up to 35 per cent. The following table summarises the returns of the companies making up the BSE Auto index: 

Mahindra and Mahindra is the top performing stock within the index, gaining 35 per cent in 2022, so far. The stock has seen a rally owing to a strong outlook in sports utility vehicles, commercial vehicle and tractor segments. For automotive stocks which have a direct connection with the national economy, things are changing for the better. A moderation in commodity prices and the gradual phasing out of the semiconductor crisis are turning the industry towards normalcy. The recent rally in automobile stocks can be attributed to a decline in metals prices, more availability of chips along with decently attractive valuations and a predicted boost in new launches ahead of a good monsoon and festive season. Filtering the companies above the market capitalisation of ₹1,000 crore, we found that the top 10 companies delivered returns of up to 62.32 per cent on an YTD basis and 153.18 per cent on a one year basis.

Sterling Tools, Shanthi Gears and Rolex Rings managed to deliver returns of more than 50 per cent. On the other hand, in the past one year, two automobile stocks from the list were able to double investors’ returns, namely, JBM Auto and Schaeffler India. JBM Auto zoomed 153.18 per cent whereas Schaeffler India jumped 121.21 per cent. The rest of the companies also cheered investors’ with decent gains.

Outlook

In terms of month-on-month sales, the automobile industry has been witnessing gradual improvement. This is because of the curiosity about new launches, improved availability of semiconductor chips, lowering of commodity prices and optimistic consumer sentiment in rural areas. The issues related to raw material are gradually disappearing with correction in international competitive environment. The passenger vehicles segment will be supported by pent-up demand, new launches and greater penetration of electric vehicles. Besides, domestic steel prices have corrected due to the imposition of export duty. 

A report from JPMorgan highlights that domestic steel prices have slipped over 20 per cent from the peak in May 2022. This will augur well for the sector to slice the raw material costs. Meanwhile, sales volume in the tractor segment is expected to gain traction due to the likelihood of a normal monsoon, higher agricultural prices and recovery in the rural economy. In terms of emerging market trends, the electric vehicle trend has been catching attention recently. The government is trying to curb carbon emissions while reducing reliance on petrol and diesel which is creating a substantial demand for electric vehicles. 

It is estimated that from 2020 to 2027, the electric vehicle market shall grow at a CAGR of 44 per cent to achieve 6.34 million unit annual sales by 2027. By 2030, the electric vehicle industry is expected to create five crore direct and indirect jobs. The Indian automobile industry is expected to record strong growth in 2022-23, post recovering from the effects of the pandemic. Electric vehicles, especially two-wheelers, are likely to witness positive sales in 2022-23. India is aiming to have 30 per cent of its passenger vehicle sales as electric vehicles by 2030. Already, home-grown players such as Tata Motors and Mahindra Electric along with foreign players like MG Motor and Hyundai are competing for a share of this pie.