Best Auto Stocks to Buy in India

Updated – December 2020

Best Auto Stocks to Buy Now in India

In this article, we will cover

– The Importance of the Automobile sector and its growth potential
– Factors an Investor must look at while deciding the best auto stocks to buy
– A comprehensive well-researched list of best auto stocks to buy
– Model portfolio to gain exposure to the best Indian auto stocks
– Profile, pros and cons of the companies included in the model portfolio

Importance of Automobile Sector and its Growth Potential

The automobile sector contributes about 50 % of the manufacturing GDP in India, 26% of the industry GDP and 7.1 % of overall GDP. A lot of other sectors such as steel, iron, rubber, oil, glass, etc rely on the automobile and the auto component sector. The automotive sector accounts for about 15 percent of the country’s total tax collections and employs 3.2 crore people, directly and indirectly. This shows why the automobile sector is important for the health of the economy.

India is the world’s fourth-largest automobile market for vehicle sales by volume in the world only after China, USA and Japan. Car penetration in India is currently 28 per 1000 inhabitants, which is already 180 in China and over 800 in the US which lays out a huge runway for the sector over the long term. 

The two-wheeler segment dominates the Indian automobile market in terms of volume due to its young and growing middle class population. It accounted for 80.8% of the total vehicle sales volumes in FY20. The passenger cars segment which accounted for 12.9% of volumes is dominated by small and mid-sized cars.

The Indian automobile industry is supported by various factors such as availability of skilled labour at low cost, robust R&D centers, and low-cost steel production. The industry also provides great opportunities for investment and direct and indirect employment to skilled and unskilled labour. Auto ancillaries and tyre industries are directly dependent on the original equipment manufacturers (OEMs). Demand for these industries mostly arise from the OEMs or the replacement market. Overall the Automobile Industry has a bright future over the long term period. 

Factors an investor must look at while deciding the best auto stocks to buy

Automobile industry is a highly cyclical industry which means during an economic boom, automobile makers will be able to grow their volumes at a very high rate, whereas the volumes suffer during an economic downturn. This is because discretionary expenses are easier to cut from a consumer’s budget during hard times rather than essential costs. 

Before investing in the automobile stocks, one should be very careful of this cyclical nature of the industry and not be caught at the extreme end of the cycle. Investors should also look at how companies deal with the cyclical nature and reduce their volatility. They try to cut down their costs during downturns while maximizing revenue during upturns. 

Other than that, investors should look at automobile stocks that are fundamentally sound, who have strong balance sheets, proven track record and management capabilities. The companies should have visibility in growth and the ability to come out stronger from downturns.

Factors such as High return ratios, lower debt to equity ratio, growth in wholesale & retail volumes on a quarter on quarter & year on year basis, profit margins, etc should be looked at. The below-mentioned model portfolio includes the best stocks in the Indian automobile industry one can invest in. It keeps in mind the above factors along with other strengths, weaknesses, and consistency in performance. 

Summary Table of Best Auto stocks to buy now in India

Sr. No Company Name BSE Scrip Code NSE Symbol CMP as on Dec 04, 2020 (In Rs) Rating Industry
1 Maruti Suzuki 532500 MARUTI 7803.15 2 Automobile
2 Tata Motors 500570 TATAMOTORS 184.15 0.5 Automobile
3 Hero Motocorp 500182 HEROMOTOCO 3180.45 4 Automobile
4 TVS Motors 532343 TVSMOTOR 498.1 0.5 Automobile
5 Bajaj Auto 532977 BAJAJ-AUTO 3311.4 4.5 Automobile
6 Eicher motors 505200 EICHERMOT 2553.5 3 Automobile
7 Ashok Leyland 500477 ASHOKLEY 94.8 0.5 Automobile
8 M&M 500520 M&M 750.55 0.5 Automobile
9 Escorts 500495 ESCORTS 1432.4 0.5 Automobile
10 VST Tillers & Tractors 531266 VSTTILLERS 1932.85 2 Automobile
11 MRF 500290 MRF 78698.15 2 Automobile- Tyres
12 Ceat 500878 CEATLTD 1153.9 0.5 Automobile- Tyres
13 Apollo Tyres 500877 APOLLOTYRE 188.25 0.5 Automobile- Tyres
14 Balkrishna Industries 502355 BALKRISIND 1649.5 3 Automobile- Tyres
15 Minda Inds 532539 MINDAIND 393.05 0.5 Auto Ancillary
16 Bosch 500530 BOSCHLTD 13119.65 4 Auto Ancillary
17 Motherson Sumi 517334 MOTHERSUMI 158.85 1 Auto Ancillary
18 Endurance Technologies 540153 ENDURANCE 1168.55 4.5 Auto Ancillary
19 Exide Industries 500086 EXIDEIND 186.85 3 Auto Ancillary
20 Amara Raja Batteries 500008 AMARAJABAT 911.6 4 Auto Ancillary

Detailed profile, pros and cons of stocks in the model portfolio

Hero MotoCorp

Hero MotoCorp continues to consolidate its leadership position as the world’s largest two wheeler manufacturer for 18 years consecutively. The company has a high presence in rural India and has been a market leader in the entry and deluxe segment of motorcycles. It has expanded its product portfolio with entry into scooter, premium motorcycle segments and Electric Vehicle segment through strategic investment in electric two-wheeler manufacturer ‘Ather Energy’. With a focus on customer experience, expansion of distribution network & institutional sales, investment in brand building activities and ramp up of Research & Development it has been able to achieve great scale.   

Hero Motocorp has consistently delivered superior return ratios with ROCE of over 40% and has a strong balance sheet with negligible debt with strong free cash flows. Looking at the negatives for the company, it is highly domestic dependent. Although it’s present in over 37 countries only 3% of its sales accrue from exports. In order to expand sales further it will have to increase this exposure. The company has had lower sales growth in the past among its peers and is facing high competition, but Hero is expected to be the least impacted from the covid-19 pandemic due to its high rural presence. Rural India has been less affected by the virus than urban areas.

It is expected to recover the fastest with positive growth in farming and agriculture segments supported by expectations of good monsoon and strong Rabi crop. Further, in tough times, buyers tend to avoid premium vehicles and go for the cost effective ones, thus benefiting Hero.

Bajaj Auto

Bajaj Auto is another two-wheeler company that has proven itself over the years. What differentiates Bajaj Auto from other two-wheeler makers in India is its relentless focus on markets outside of India.Its growth and presence in the international markets have been on the back of its own brands as well as its alliance with KTM. This has enabled it to de-risk by not being over reliant on any one geography or product. It is by far India’s largest motorcycle and three-wheeler exporter. The company’s revenue share from exports has increased from 28.2% in FY10 to 42% in FY20.

It’s revenue has grown at a CAGR of 10% over FY10-FY20 whereas profit after tax has grown at a CAGR of 12% over the same period. It also continues to dominate the three wheeler segment and remains the market leader. On the other hand, Bajaj has a poor presence in the scooter market. Bajaj Auto was the leader in the scooter market till the motorcycle momentum picked up in the 1990s. Bajaj shut down its scooter business post that, but the scooter business is booming once again and it could be an avenue the company can re-explore to improve its product portfolio. 

Eicher Motors

Eicher Motors owner of iconic Royal Enfield leads the premium motorcycle segment in India. Royal Enfield has captured nearly 95% of the 250cc plus premium segment category. It enjoys a virtual monopoly in this segment without any intentions of entering the other segments. One of the main reasons for the strong brand name – Royal Enfield is due to its high-quality standards. Royal Enfield emphasizes on providing best quality to its customers. The company also has a joint venture with the Volvo group, VE Commercial Vehicles Limited which designs, manufactures and markets reliable, fuel-efficient trucks and buses.

Eicher Motors has been the fastest growing two wheeler company with sales growing at CAGR of 19% over FY10-FY20 whereas profit after tax has grown at a CAGR of 47% over the same period. Since Eicher Motors caters to the premium category, any economic downturn will affect the company the most. Also the threat of competition is increasing, with the advent of players like BMW, Triumph, Husqvarna, Honda, Norton, Benelli and UM in this space.

MRF

MRF is ranked India’s number 1 manufacturer and is among the worlds’ top 20 Tyre Manufacturers. It is also India’s largest Original Equipment Manufacturer (OEM) tyre supplier with an expansive tyre range from two-wheelers to fighter aircrafts. MRF is recognized for its drive towards continuous quality improvement and customer satisfaction. MRF was the first company to export tyres from India and still has a strong holding in the exports market across 65 countries. It has a complete product portfolio with tyres for all types-heavy duty vehicles, SUVs, small & luxury cars, two & three wheelers, conveyor belts, paints & coats and pretread.

It also has a strong financial position with a solid past record. Over two-thirds of MRF’s revenue comes from replacements. Higher share from this segment helps the company insulate from the cyclicality. However the company is still exposed to cyclicality in its raw material prices–Natural Rubber and other crude derivative products. Given the high competition, the ability to pass on RM price hikes in a timely manner is a challenge for all players. Further, MRF’s performance is dependent on the automotive demand, which exhibits cyclicality in most of the segment

Maruti Suzuki

Maruti Suzuki set up as a joint venture between Maruti and Suzuki is India’s largest car maker selling more than half of the cars on road. It has created unmatched brand equity over the years. The company has a strong product portfolio with models in every segment. It focuses on continuous process improvement, effective cost control measures and flexible manufacturing processes. The company is almost debt-free due to its strong cash generating ability.  It possesses a healthy balance sheet with net cash on books of Rs 35,000 crore with core average RoIC placed at a healthy 22%.

However The Indian PV market remains highly competitive, with existing and new players launching new models regularly, especially in the compact and mid-size segment.The number of players in this segment increased to 19 in fiscal 2020 from 7 in fiscal 2008. With more players and models vying for a share of the growing pie, competition in the domestic car market may intensify, resulting in price competition and lower realisations. Due to the coronavirus pandemic, social distancing norms may result in higher demand for own vehicles, especially entry level and small PVs. Maruti has the widest portfolio in this segment and is well placed to benefit from the same.

Risks & Challenges

Over the last few years evolving customer needs, disruptive impact of technology and major regulatory reforms have gained centerstage in the automotive ecosystem. Companies are facing increasing pressures to develop, upgrade and successfully launch new & innovative products to meet changing customer demand. In the recent past, Automobile industry has been struggling with insurance covers being made compulsory & BS-VI transition which has made the ownership cost of a vehicle rise very steeply. The threat of electric vehicles and of course the covid-19 pandemic are other challenges faced by the industry. Rising concern for climate change and sustainability has led to the need for alternative energy such as electric vehicles. This will disrupt Auto component companies as it has only 20 moving parts, while a regular petrol or diesel vehicle has more than 2,000.

Apart from this, there has not been much respite as the industry demands some relief from the government in the form of GST reductions or Scrappage policy. These newly emerging trends are truly testing the automobile company’s ability to grow. Companies will have to be fundamentally strong and capable to remain relevant. We believe that the companies in our model portfolio match these requirements and have witnessed several business cycles  and emerged stronger each time. These companies have adapted and overcome several technological disruptions and can be counted on to continue doing so in the future as well.

Here’s a quick video from our team on how you can select the Best Auto Stocks:

Model Portfolio:

In order to get an exposure to best Indian auto stocks, you would need a total of Rs. 2,02,103 for the below curated portfolio as of December 04, 2020. 

Company Name Weightage (%) CMP (as on December 04, 2020) Quantity Total (Rs.)
Hero Motocorp 14.2% 3180.45 9 28624.05
Bajaj Auto 14.7% 3311.4 9 29802.6
Eicher motors 1.3% 2553.5 1 2553.5
Maruti Suzuki 30.9% 7803.15 8 62425.2
MRF 38.9% 78698.15 1 78698.15
TOTAL 100     202103.5

Detailed overview of the Best Auto stocks to buy now in India

The table below covers some of the most important factors while evaluating Best Auto stocks such as the return ratios – RoE, operating margins, sales and earnings growth, market cap, etc.

Sr. No Company Name BSE Scrip Code NSE Symbol CMP as on Dec 04, 2020 (In Rs) Rating Industry Market Cap (Rs crores) Price/Earnings Dividend yield (%) Debt/Equity Return on Equity (%) Return on Capital Employed (%) Net Worth (In Crore) Operating Margin (%) Inventory Turnover Ratio Topline Growth (3 Years CAGR) (%) Bottomline Growth (3 Years CAGR) (%) Working capital cycle (Days) FY20 volume growth YoY (%)
1 Maruti Suzuki 532500 MARUTI 7803.15 2 Automobile 233615.1 57.5 0.8 0.0 6.8 8.7 48963 7.6 16.5 3.6 -18.0 208.1 -16.1
2 Tata Motors 500570 TATAMOTORS 184.15 0.5 Automobile 59044.8 0.0 2.3 -16.0 -0.4 50575 6.8 4.4 -1.1 -71.3 -46.9
3 Hero Motocorp 500182 HEROMOTOCO 3180.45 4 Automobile 63632.0 25.1 2.8 0.0 22.1 27.2 14913 12.2 15.8 0.7 -4.1 227.7 -15.6
4 TVS Motors 532343 TVSMOTOR 498.1 0.5 Automobile 23004.3 73.9 0.7 2.8 20.8 13.0 3338 11.4 10.0 14.8 9.6 -26.3 -18.0
5 Bajaj Auto 532977 BAJAJ-AUTO 3311.4 4.5 Automobile 96291.2 22.6 3.6 0.0 23.2 29.6 23720 16.9 20.9 11.2 8.4 450.9 -8.0
6 Eicher motors 505200 EICHERMOT 2553.5 3 Automobile 67516.3 61.9 0.5 0.0 19.4 24.6 10320 18.8 8.4 9.2 3.1 290.1 -16.0
7 Ashok Leyland 500477 ASHOKLEY 94.8 0.5 Automobile 27623.3 0.5 2.3 5.8 8.9 7286 13.8 5.9 -1.4 -32.8 -32.8 -37.0
8 M&M 500520 M&M 750.55 0.5 Automobile 90448.5 0.3 1.8 -1.8 8.2 40019 13.4 4.6 4.4 169.2 -22.0
9 Escorts 500495 ESCORTS 1432.4 0.5 Automobile 18351.7 30.5 0.2 0.0 14.8 19.1 4459 14.0 4.5 11.9 52.3 214.0 -10.8
10 VST Tillers & Tractors 531266 VSTTILLERS 1932.85 2 Automobile 1644.0 34.9 0.8 0.0 4.2 6.3 624 8.7 3.3 -7.0 -31.8 360.6 -14.0
11 MRF 500290 MRF 78698.15 2 Automobile- Tyres 33020.4 24.6 0.1 0.2 12.3 12.6 12577 16.6 3.5 6.6 -1.7 76.1
12 Ceat 500878 CEATLTD 1153.9 0.5 Automobile- Tyres 4689.0 16.2 1.0 0.6 8.8 10.5 3046 12.1 4.3 5.5 -12.5 -29.5
13 Apollo Tyres 500877 APOLLOTYRE 188.25 0.5 Automobile- Tyres 11040.6 34.4 1.6 0.6 4.8 5.3 10097 12.8 2.8 7.4 -24.5 3.8
14 Balkrishna Industries 502355 BALKRISIND 1649.5 3 Automobile- Tyres 32200.8 33.5 1.2 0.2 17.1 16.9 5415 29.9 3.4 8.9 8.6 122.1
15 Minda Inds 532539 MINDAIND 393.05 0.5 Auto Ancillary 10507.0 317.8 0.1 0.5 10.9 11.9 2025 9.4 6.1 17.3 1.5 27.5
16 Bosch 500530 BOSCHLTD 13119.65 4 Auto Ancillary 38822.8 58.7 0.8 0.0 12.0 18.5 8826 10.3 4.2 -1.9 -14.1 213.9
17 Motherson Sumi 517334 MOTHERSUMI 158.85 1 Auto Ancillary 48726.9 1.0 1.3 11.6 11.6 10951 6.3 7.6 14.5 -16.1 -22.7
18 Endurance Technologies 540153 ENDURANCE 1168.55 4.5 Auto Ancillary 16361.9 43.9 0.5 0.2 19.9 21.2 3194 15.2 7.4 7.4 19.1 30.4
19 Exide Industries 500086 EXIDEIND 186.85 3 Auto Ancillary 16464.5 27.0 2.1 0.1 12.3 17.0 6814 9.1 3.0 9.0 -1.3 526.6
20 Amara Raja Batteries 500008 AMARAJABAT 911.6 4 Auto Ancillary 15948.8 28.2 1.2 0.0 18.6 23.5 3923 15.9 4.2 8.8 11.3 101.9

Our Collection of Best Stocks to Buy Other links you may find useful:

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1 Comment

  1. R L Udayakumar

    Good very informative and useful for taking decisions on to make investment in Auto Stocks
    Thanks

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