Updated – February 2021
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.
Besides Budget 2021 provides hope for the Auto industry with the introduction of the voluntary vehicle scrappage policy. The policy makes it compulsory to undergo a fitness test for private vehicles over 20 years of age and commercial vehicles over 15 years of age. Also a charge of green tax at the time of fitness renewal will dis-incentivize the use of older vehicles. 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 which are fundamentally sound, who have strong balance sheets, proven track record and management capabilities. The companies should have visibility in growth and ability to come out stronger from downturns.
Factors such as High return ratios, lower debt to equity ratio, growth in wholesale & retail volumes on 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 Feb 19, 2021 (In Rs)||Rating||Industry|
|10||VST Tillers & Tractors||531266||VSTTILLERS||1816.6||1||Automobile|
|13||Apollo Tyres||500877||APOLLOTYRE||238.55||0.5||Automobile- Tyres|
|14||Balkrishna Industries||502355||BALKRISIND||1550.25||2||Automobile- Tyres|
|15||Minda Inds||532539||MINDAIND||565.45||0.5||Auto Ancillary|
|17||Motherson Sumi||517334||MOTHERSUMI||213.5||0.5||Auto Ancillary|
|18||Endurance Technologies||540153||ENDURANCE||1395.45||3||Auto Ancillary|
|19||Exide Industries||500086||EXIDEIND||204.45||2||Auto Ancillary|
|20||Amara Raja Batteries||500008||AMARAJABAT||877.55||3||Auto Ancillary|
Detailed profile, pros and cons of stocks in the model portfolio
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 27% and has a strong balance sheet with negligible debt and 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 4% 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 was 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 has recovered the fastest with positive growth in farming and agriculture segments supported by good monsoon and strong Rabi crop.
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 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 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 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 possesses a healthy balance sheet with 0 debt due to its strong cash generating ability and RoIC placed at a healthy 28%. 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. The economic recovery from COVID-19 pandemic and improving income levels are likely to keep the demand strong in the medium term. Maruti’s strong distribution network and rural penetration will aid stronger growth.
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.
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:
In order to get an exposure to best Indian auto stocks, you would need a total of Rs. 202103.5 for the below curated portfolio as of February 19, 2021.
|Company Name||Weightage (%)||CMP (as on Feb 19, 2021)||Quantity||Total (Rs.)|
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 Feb 19, 2021 (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 (%)|
|10||VST Tillers & Tractors||531266||VSTTILLERS||1816.6||1||Automobile||1569.46||21.08||0.83||0||4.18||6.29||624.32||11.24||3.32||-6.97||-31.82||319.02||-14.0|
|13||Apollo Tyres||500877||APOLLOTYRE||238.55||0.5||Automobile- Tyres||15150.33||21.54||1.26||0.61||4.76||5.29||10103.58||15.05||2.84||7.4||-24.46||3.61||–|
|14||Balkrishna Industries||502355||BALKRISIND||1550.25||2||Automobile- Tyres||29969||28.21||1.29||0.16||17.07||16.89||5415.16||30.43||3.35||8.92||8.61||114.12||–|
|15||Minda Inds||532539||MINDAIND||565.45||0.5||Auto Ancillary||15376.21||146.97||0.07||0.53||10.92||11.85||2023.07||10.56||6.13||17.3||1.45||24.94||–|
|17||Motherson Sumi||517334||MOTHERSUMI||213.5||0.5||Auto Ancillary||67421.9||92.34||0.7||1.29||11.63||11.55||10951.26||7.11||7.59||14.46||-16.11||-22.12||–|
|18||Endurance Technologies||540153||ENDURANCE||1395.45||3||Auto Ancillary||19628.8||43.83||0.39||0.18||19.85||21.2||3194.44||15.74||7.38||7.36||19.11||28.35||–|
|19||Exide Industries||500086||EXIDEIND||204.45||2||Auto Ancillary||17378.25||24.19||2.01||0.07||12.29||17.02||6814.11||9.79||3.03||8.99||-1.33||502.79||–|
|20||Amara Raja Batteries||500008||AMARAJABAT||877.55||3||Auto Ancillary||14989.65||25.24||1.25||0.02||18.55||23.48||3922.77||15.72||4.24||8.75||11.31||98.62||–|
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