- All shares recorded growth on FY10 and FY11 due to the government’s announced measures to assist in the recovery from the 2008 global financial crisis.
- At FY12-14, high interest rates and high fuel prices, together with inflation, dampened business sentiment, which led to a contraction.
- FY15-18 saw an improvement in customer attitudes due to the appointment of a stable government. The government placed great emphasis on production and introduced favorable policy decisions, as well as an emphasis on easy trade, fiscal stability and inflation management.
- On FY19, PV sales had an effect due to changes in regulations, rising interest rates and high fuel prices. FY20 saw a contraction in the global economy as well as in India due to safeguard measures introduced by various countries. FY21 was a year that affected Covid.
(Source: Annual Reports, Equitree Capital)
To make a high return, the best time to invest is when the sector is slipping and valuations are low. At present, the automotive sector provides approximately 5% of the total market value, which is in line with its long-term averages. However, we have seen before that when it comes to economic growth, the industry tends to go up to 9% of the total market value.
India’s economic growth is likely to grow by more than 7% to achieve the ambitious goal of becoming a $ 5 trillion economy set by the Government of India. This means that the car industry should also lead to a cumulative contribution of 9% of the total market value, thereby creating significant value over a period of 2 to 3 years.
Requirement to select speed
India’s leading four-wheeler company, Maruti Suzuki, said they were seeing high demand in terms of inquiries and bookings, but due to supply side issues, many bookings have been pending. The only challenge left is the supply of semiconductors and commodity inflation. Looking at the waiting time of many brands, it is clear that the demand for cars is not a challenge. Some models like the Mahindra XUV700 have a waiting time of 88 – 90 weeks while the Mahindra Thar has a 43 – 44 week waiting period. The Tata Motors Nexon EV has a waiting time of 12 – 16 weeks, while the Tata Punch has a 12-week waiting period.
Demand for commercial vehicles is expected to increase as projects increase. The government’s continued emphasis on spending on infrastructure is leading to increased demand for commercial vehicles. Demand will increase even more with the demand for refurbishment as fleet owners would now seek to replace their older trucks. It is important to keep in mind that demand in rural areas has not picked up yet and will be a key factor that can be monitored for the overall recovery.
Export opportunities that promote growth
Large passenger cars and two-wheelers have seen their exports increase mainly due to demand from Latin America, Africa and Southeast Asia. In addition to the above, international players are exploring India to get parts and components as part of their China +1 strategy. We are already seeing prominent companies like Case New Holland Industrial, the world’s fourth largest tractor manufacturer, strive to triple their purchases of parts and components from India worth over $ 300 million over the next three years.
Current disruption that provides an opportunity to invest from a long-term perspective
Due to supply-side constraints from the supply of semiconductor chips to price increases of key commodities, the automotive industry could remain under pressure for several quarters, but these quarters could also provide investors with longer-term horizon opportunities.
Investors from the bottom up are always looking for companies that have not only managed to keep their heads above water in a downturn, but have also returned abnormal growth. Companies like these, which perform better during the disadvantage, end up firing on all the cylinders when the cycle takes over.
More specifically, investors should look for companies that have a diverse product range and cater to various sub-sectors of the industry as well as an emphasis on the export and barter market.
(Pawan Bharaddia, er Co-founder, Equitree Capital)
(Disclaimer: Recommendations, suggestions, opinions and opinions given by experts are their own. This does not represent the views of the Economic Times)
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