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Automobiles Sector Analysis Report 

[Key Points | Financial Year '20 | Prospects | Sector Do's and dont's]

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  • The Indian automobile market can be divided into four main segments - two-wheelers (motorcycles, geared and ungeared scooters), three-wheelers, passenger vehicles (cars and utility vehicles), and commercial vehicles (light, medium and heavy).
  • Two-wheelers and passenger vehicles dominate the domestic Indian automobile market and account for 81% and 13% of total unit sales, respectively. Passenger car sales are dominated by small and mid-sized cars.
  • India is the fourth largest automobile market in the world. It is also the largest manufacturer of two-wheelers and the seventh largest manufacturer of commercial vehicles in the world
  • Rising income and greater availability of credit and financing options have been the key growth drivers for the sector. Moreover, the demand for commercial vehicles driven by a high level of activity in the infrastructure sector has aided growth. India's established auto ancillary industry also provides the required support to boost growth in the sector.
  • India has significant cost advantages - auto firms in India save around 10-25% on operations vis-a-vis Europe and Latin America. As a result, the Indian automobile industry has received Foreign Direct Investment (FDI) worth US$ 24.2 billion between April 2000 and March 2020.
  • The 8.7 trillion (US$ 118 billion) Indian automobile industry is expected to reach 16- 18 trillion (US$ 251- 282 billion) by 2026 with strong policy support from the government. Initiatives like Make in India and Automotive Mission Plan 2026 by the government are expected to give a huge boost in revenue to the sector.
  • The Indian automobile industry is slowly shifting its focus to electric cars with the purpose of reducing emissions. The Union Cabinet has approved the proposal for the implementation of the second phase of Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME-II) in India which is expected to support up to 1 million two-wheelers.

How to Research the Automobile Sector (Key Points)

  • Supply
  • The Indian automobile market has some amount of excess capacity.
  • Demand
  • India has one of the lowest levels of per capita ownership (28 vehicles per 1000 individuals) as compared to other countries. Rise in middle-class income and young population may result in strong growth.
  • Barriers to entry
  • High capital costs, technology, distribution network, and availability of automobile components.
  • Bargaining power of suppliers
  • Low, due to stiff competition.
  • Bargaining power of customers
  • Very high, due to availability of options.
  • Competition
  • High. Expected to increase even further.
  • Threat of Substitutes
  • Not very high. Although public transport (buses/train) is available, none provide the same convenience and value. However, with increasing shared mobility options and improving public transport such as metros, this could go up.

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Financial Year '20

  • The automobile industry was hit hard in FY 2019-20 as sales fell across vehicle segments. According to data released by SIAM, the Indian automobile industry recorded a 20.3% decline in domestic sales in FY20 as compared to a 5.9% growth in FY19.
  • The Passenger Vehicle segment declined 17.3% in FY20 (as compared to 2.8% growth in FY19) due to weak consumer sentiment, the rising cost of vehicle ownership, and general economic slowdown.
  • The Commercial Vehicle industry in India registered a 30.0% decline in FY20 compared to 17.1% growth in FY19, as a result of subdued demand, and higher capacity arising from the transition to BSVI.
  • After an outstanding growth in FY19, Indian industry's domestic sale of motorcycles in FY20 saw a decline of 17.5%. It was not just the relative lack of demand as the motorcycle industry was subjected to several regulations which significantly increased the cost of ownership.
  • Industry-wide domestic sales of three-wheelers fell as well. After enjoying growth of over 10% in FY19, it fell by 9.2% in FY20.
  • The Covid-19 pandemic also cast a long shadow over a much anticipated mild recovery in the automobile industry. Besides, the economic and political uncertainties and increased protectionism in some of the export markets impacted the exports sales.
  • To adjust to the changing economic climate, companies adapted themselves to cater to the large middle-class population by dropping their traditional structure and designs. Maruti Suzuki launched 'Maruti Suzuki Subscribe', a service that allows customers to lease select models for a specific period.
  • The interest in a personal mode of transport revived due to hygiene and health issues. This gave a boost to pre-owned vehicle businesses post-Covid-19. Mahindra First Choice Wheels Limited (MFCWL), India's foremost organized multi-brand used car player, sold about 200,000 used vehicles during FY20.

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Prospects

  • With the rise in fuel price of diesel and increased focus of the government towards increasing the CNG distribution infrastructure across the country, the demand for CNG vehicles could see an upsurge in the near future.
  • The electric vehicles/hybrid market is buzzing with a lot of activity especially in the two-wheeler and three-wheeler segments with a host of new entrants eyeing the market. The Indian automobile industry is expected to move forward in this direction with increased local production especially in the battery segment.
  • India with a relatively low car penetration level and good prospects of economic growth is on the path to becoming the third-largest passenger vehicle market in the world and this offers a huge opportunity to automobile companies.
  • Connectivity is still in the early stages of adoption in India. A minuscule share of vehicles sold in India comes with factory-fitted connectivity features, but the mass adoption of smartphones, coupled with low data costs, could enable connectivity features to increase.
  • Autonomous vehicles (AVs) offer promise to resolve some of India's road-safety challenges. Drivers and passengers in India see about 12% of global road fatalities, and more than 80% of road accidents involve some aspect of driver error. AVs have the potential to reduce traffic congestion and improve safety and fuel efficiency.
  • The organized pre-owned car market with better availability, reliability, transparent pricing, and finance availability will attract more customers and help expand the market
  • The shared mobility space has the potential to pave the way for several value-creation opportunities for automobile companies, including generating employment opportunities for skilled drivers and helping meet the aspirations of new-age customers.

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FAQs on the Automobile Sector

How has the automobile sector performed in the past decade and when is a good time to invest in the sector?

The automobile sector has been one of the sectors that has driven the stock market rally in the past decade. While it has lost some of the gains in the last two years, it has still given returns of more than 150%.

As the demand for automobiles is closely linked to the economy, automobile stocks are usually riskier - their fortunes are prone to economic booms and busts. For this reason, they are often called cyclical stocks. Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

Therefore, the best time to buy such stocks (automobile stocks) is at the start of an economic expansion and the best time to sell them is just before the economy begins to slow down. However, before selecting a stock, one must check whether the industry is due for revival or not.

To know more about the sector's past and ongoing performance, have a look at the performance of the NIFTY Auto Index and BSE Auto Index

Where can I find a list of automobile stocks?

The details of listed automobile companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of auto stocks.

Which automobile stocks were the top performers over the last 5 years?

TVS Motors, Maruti Suzuki and Force Motors were the top automobile performers over the last 5 years in terms of sales and profit growth.

TVS Motors' growth can be attributed to its strong supply chain network and its presence in all three subsegments of two-wheelers whereas Maruti Suzuki's growth can be attributed to its position as the country's top four-wheeler manufacturer which has driven consistent sales and revenue for the company.

Force Motors, as a fully integrated automobile company, has done well on the back of its expertise in design, and development of full-spectrum automotive components.

To know which other companies performed well over the last 5 years, check out our entire list of top performers.

What kind of dividend yields do automobile stocks offer?

The automobile sector, being consumer cyclical, is dependent on business cycles and economic conditions. Dwindling vehicle sales, fierce industry competition and trade tensions can keep profits under pressure for automobile companies.

As dividends are mostly paid from the remaining share of profits once essential expenses are met, not all automobile stocks can steer you to handsome dividends.

However, there are automobile stocks that have a strong history of dividend growth. These belong to mature companies that are less susceptible to large swings in the market.

To know which are these companies, check out our list of top automobile stocks offering high dividend yields.

Which are the automobile stocks with the best shareholder returns?

Shareholder returns measure the total returns generated by a stock to an investor. This profitability helps gauge a company's effectiveness when it comes to using equity funding to run its daily operations. In the Indian stock market, Hero MotoCorp, Eicher Motors and Bajaj Auto are the top automobile stocks right now with the best shareholder returns.

To know which other automobile stocks offer great return on equity, you can check out the top automobile stocks offering the best shareholder returns here.

Which are the best automobile stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of stocks are -

  • Price to Earnings Ratio (P/E) - It compares the company’s stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

    To find stocks with favorable P/E Ratios, check out our list of automobile stocks according to their P/E Ratios

  • Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

    To find stocks with favorable P/BV Ratios, check out our list of automobile stocks according to their P/BV Ratios

Resources on the Automobile sector

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