We'll Say This Again... It's the Right Time to Buy Select Auto Stocks - The 5 Minute WrapUp by Equitymaster
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We'll Say This Again... It's the Right Time to Buy Select Auto Stocks

Oct 19, 2018

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

Two days ago, Tanushree wrote to you about buying select auto stocks now for big long-term returns.

I agree with her view.

Why?

Because some high-quality auto stocks are now trading at reasonable prices.

Did you know that since demonetisation, auto stocks have considerably underperformed the Sensex?

That's right.

Since demonetisation, the BSE-Auto index is down 9%. Whereas, the BSE-Sensex is up 29%.

Why did this happen?

Well because the auto industry has faced several headwinds in the last two years.

First, demonetisation impacted the industry severely.

The liquidity crunch due to demonetisation impacted entry-level cars and two-wheeler sales. There was a slowdown in demand from rural and semi-urban areas.

In fact, auto sales saw their biggest monthly fall in 16 years in December 2016 when sales fell 17%.

By March 2017, sales were recovering for most companies. However, some automakers hit a speed-breaker when the Supreme Court banned the sales of Bharat Stage-III vehicles from April, when new emission norms came into force across the country.

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Then there was the GST.

Auto companies had to announce hefty discounts in June 2017 to liquidate their pre-GST stock. They were badly hit by this 'destocking' ahead of the GST roll-out.

At that time, it appeared that the worst was over for the auto industry.

But no!

2018 has been a perfect storm of uncertainty for auto companies.

A Perfect Storm Is in the Making

The main culprit is rising fuel prices.

Both petrol and diesel prices have increased 13% and 25%, respectively, in 2018. In fact, petrol prices touched Rs 90 per litre before the government cut excise duty on it.

This has scared off first time buyers. Auto companies are not sure what to do. Fuel prices are rising every day compared to the past when price increases were occasional.

Not to mention, we are now in a rising interest rate environment. Rising interest rates means higher EMIs for car owners. This could have an impact on car sales.

Apart from all this, rising prices of inputs such as steel, aluminium, rubber etc, will have an impact on the margins of auto companies.

In 2018, the BSE-auto index is of the worst performer among all sectoral indices and is down 23%.

But a perfect storm creates buying opportunities. Some auto stocks are looking attractive now.

So, let's look at the bright side.

This is what I wrote in April 2018:

  • The rural economy, represents about 69% of India's population and contributes about 45% to India's GDP.

    Over the last few years, Indian farmers have suffered from insufficient rainfall. Demonetisation in 2016 (after a good monsoon) caused crop prices to crash. This triggered a wave of farmer protests across India.

    This, in turn, pushed the government to shift policy from keeping food costs low for consumers to offering farmers higher prices for their produce.

With higher MSPs, rural incomes will improve which will have a positive impact on auto sales in the coming months.

Not to mention, the long-term growth drivers of this sector are still intact.

The quality of public transport in India is poor.

India's 'car per capita' ratio (i.e. number of cars per 1,000 population) is among the lowest in the world's top 10 auto markets.

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Similarly, India's growing working-age population will keep the demand for private vehicles high.

For all these reasons India's automobile firms will do well in the long-term.

However, you need to selective in picking stocks from this space.

They are like falling knives at the moment. Some auto stocks are still expensive despite the correction.

Kunal and I, at Smart Money Secrets, are keeping a close eye of this sector.

We prefer companies with exposure to both rural as well as urban markets. Also, the contribution of exports to total revenue is another factor that we are looking at.

Besides, market share gain, efficient allocation of capital, branding, and strong distribution network are some other factors.

Based on our analysis, we have shortlisted a few of the very best auto stocks for upcoming recommendations. They have passed our Smart Money score with flying colours.

Tanushree has found a solid auto stock for the long-term.

We will decide on one very soon.

Watch this space...

Chart of the Day

2018 hasn't been good for stalwart auto and auto ancillary companies. No wonder the BSE Auto index is down 23% this year.

Today's chart shows how India's big auto companies have fared this year.

Are Auto Companies Running Out of Gas?

The biggest losers are Tata Motors (down 57%) and Motherson Sumi (down 34%).

Others like Maruti Suzuki, Hero Motocorp, Bajaj Auto have fallen between more than 20%.

So, is this a good time to buy select auto stocks?

Kunal and I at Smart Money Secrets certainly think so.

Richa Agarwal, editor of Hidden Treasure, agrees with us.

With the recent correction in the entire auto space, she initiated a coverage on engine manufacturer this month. This company enjoys the benefits of a strong brand and a supportive parent.

Also, one of Richa's earlier 'buy at lower level' recommendations has now become a 'Buy' recommendation.

As per her forecast, there is an upside potential of more than 50%.

She sent a special update in this regard. Hidden Treasure subscribers can access it here.

If you haven't signed up for Hidden Treasure, you can do so here.

Regards,

Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

PS: Dear reader, today is the last day to claim Equitymaster's Secrets - which costs Rs 1,450 on Amazon - virtually for free. At midnight tonight, this special offer will end. This is a book that could change the way you pick stocks forever. So don't delay, act now! You can find the details here.

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1 Responses to "We'll Say This Again... It's the Right Time to Buy Select Auto Stocks"

Studycafe

Oct 23, 2018

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