It looks the stars are again shining for the auto sector

Data Source: NSE


As can be seen from the table above, there has been a clear appreciation in most of the major auto companies, although the growth in ancillaries has been more subdued.

What has driven this surge in auto stocks?

There are several reasons that have driven the surge in auto stocks and here are a few of them.

1) For the last few quarters, the biggest challenge for the auto sector was the sharp spike in the cost of inputs. Key inputs like steel had gone through the roof and that was forcing the auto companies to push a number of price hikes down to customers. That was hitting affordability and demand. But more importantly, it was badly hitting the operating margins of these companies. With most of the major commodities having tapered sharply in the last 2 months, it would be a blessing for the auto sector.
 

2) Rural demand had been tepid and that was making a real dent on the entry level cars and the two wheeler space. The premium segment vehicles were not really seeing an impact but the entry level vehicles is where the customers are the most price conscious. That is the segment that was seeing a lot of demand damage. Rural India was facing the brunt of higher inflation. However, with another normal monsoon and a bumper Kharif harvest expected, the rural demand is expected to surge in 2022. That also explains why stocks like M&M have been among the major gainers in the auto sector.
 

3) Thirdly, most auto companies had been hit badly by the chip shortage. In the last few years, cars have increasingly become smarter and that means more use of microchips. However, in the last 2 years, the supply of microchips failed to keep pace with the demand and that led to severe shortages of microchips. Most of the auto makers were even forced to shut down production due to the shortage of chips. Now that is largely under control, with the chip supplies improving and with most of the auto companies also making alternate vendor arrangements.

Of course, don’t forget the affordability factor

Since the start of the Russia Ukraine war, the price of crude jumped from $70/bbl to $130/bbl. In the last few weeks, the crude prices have stabilized. In addition, the government of India has undertaken two rounds of excise duty cuts on petrol and diesel. Also, with India shifting its oil basket largely in favour of Russia (which is offering crude at a discount), the conviction in the market is that the high cost of ownership of cars should eventually come down to more reasonable and affordable levels for the customers.
The good news is that this may not be just cars but also about 2-wheelers, tractors, commercial vehicles. The big area to look out for would be the two-wheelers.