This Could be the Best Sector in the Market Right Now

A stock market meme on WhatsApp read...

'Every Diwali we wear new clothes, burst crackers, eat sweets, and watch Rakesh Jhunjhunwala predict the mother of bull markets.'

I'm sure he will be missed this year as well.

Its barely a week to the Diwali festivities and brokerage houses have already started talking about their Diwali picks.

Honestly, I have never understood the obsession of forcefully recommending a bunch of stocks in Diwali.

You should buy stocks when they are cheap and offer a good margin of safety and sell them when you think the valuations are expensive.

Last Diwali, contrary to brokerage houses I had asked readers to avoid certain overvalued stocks and sectors.

However, this time as I run stock screeners and look for value, I'm particularly buoyant about one sector, which in my view could make big gains.

This sector has relatively underperformed the broader market but is catching up soon.

I'm talking about the auto sector and particularly the two-wheeler space along with few auto ancillaries.

If you go by the festive trends, the inventory stocking looks very impressive. A key point will be the retail sales which happen during Dhanteras and Diwali.

While passenger car sales have been showing strong growth over the past 3-6 months, the two-wheeler space is now showing signs of recovery.

The problem in the stock market is that stocks go up faster and much before than the actual numbers are reported.

Maruti Suzuki share price is trading at a all time high. It has been on an uptrend since the past six months while its monthly sales numbers gradually inched upwards.

The passenger vehicle cycle has more legs to grow but from a risk reward perspective the way these stocks have run up, the valuations don't look compelling.

The space which caught my attention was the two-wheeler space. Here we can see a combination of the initial stages of an upcycle and some stocks trading at extremely attractive valuations.

Did you know that we still haven't crossed the peak of 2015-16 in the two-wheeler space? The two-wheeler sector has stagnated over the past seven years.

While the reasons range from a slowdown in rural segment to pure cyclicality, my point is seven years is a long time for any cycle.

Earnings of major two-wheeler companies are depressed and as a result, the stocks look expensive from a historical valuation perspective.

The stock of Hero MotoCorp India's largest two-wheeler maker has given a zero return over the past ten years.

The main reason the stock being an underperformer is its high exposure to the rural market along with mass market motorcycles being a large part of the portfolio.

The company reported an EPS of Rs 180 in FY17 while the FY23 EPS was Rs 141.

This led to a de-rating of valuation multiple. In fact, the story is pretty much the same with premium two-wheeler maker Eicher Motors too.

The stock has stagnated over the past six years with absolutely no return.

Eicher Motors reported an EPS of Rs 61 in FY17 while the EPS in FY22 was Rs 61 too. No growth in earnings.

The point I'm trying to make is about cyclicality.

A 7-year cycle, when it turns up, creates great value for investors.

Also, interest rates have peaked and inflation is coming under control due to a near normal monsoon.

With more than 50% of two wheelers being financed by banks and NBFCs, a decline in interest rates would drive demand.

I believe this is one space which should not be missed.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure