Will Automotive Stocks Change From Slow Lane To Fast Lane?
Dalal Street Investment Journal|October 11, 2021
Automotive stocks have had a special emotional value for those investors who have been investing in the markets for more than two decades. The likes of Bajaj Auto, Ashok Leyland, Hero Motors, Eicher Motors and Tata Motors have created humongous wealth for its shareholders. However, the industry has gone through a rough patch over the past few years. The silver lining is that there is the likelihood of electric vehicles changing the fortunes of the industry. Yogesh Supekar explains why a fresh and open-minded view on automotive stocks is required at this point of time
Yogesh Supekar

The truth is there for all to see – automotive stocks have taken a beating and have not participated in the current market rally. Several investors who are holding on to their automotive stocks in the portfolio with higher weights assigned to the sector stocks are clearly complaining. Says Rahul Gaikwad who has been holding automotive stocks in his portfolio for over a decade, “I have Bajaj Auto as my top portfolio holding and near about 10 per cent of my portfolio is Tata Motors. I bought Bajaj Auto in 2010 at around ₹830 per share. The shares of Bajaj Auto have gained by 364 per cent since January 2010 while the BSE Sensex has jumped higher by 235 per cent in a similar period.”

“I am happy Bajaj Auto has outperformed the Sensex over my holding period and I have enjoyed the dividends as well. This year I got ₹140 per share as dividend. The dividend yield on my buying price comes to about 17 per cent. I am happy with this kind of return. On the flip side, both Bajaj Auto and Tata Motors have, over the past five years, underperformed heavily. Bajaj Auto has gained by 33.21 per cent while Tata Motors has delivered negative 41 per cent when the Sensex has gained by 109 per cent. I do not know if all the automotive stocks have displayed a similar performance but my portfolio has underperformed heavily in the past five years due to higher allocation to these two underperforming automotive stocks,’ he adds.

“However, I now understand that brokers have a buy rating on both Bajaj Auto and Tata Motors. So, I am willing to wait for few more years as I believe the worst is over for the automotive sector in India,” he further states. Indeed, automotive sector stocks have underperformed the markets in the past few years but if we go by the near-term performance of the automotive stocks, one can see that there is some value buying emerging in these scrips. BSE Automotive index, the gauge that tracks the performance of the largest automotive sector companies listed on the bourses, gained by 1.45 per cent in the past one week when the BSE Sensex was down by 2.39 per cent.

In the month gone by, BSE Automotive index was up by 5.57 per cent when the BSE Sensex has gained a little over 1 per cent. Clearly enough, the automotive index is showing signs of outperformance in recent periods after underperforming in 2020 and in 2021. On YTD basis the automotive index is up by 13.48 per cent while the BSE Sensex is up by 22.76 per cent. What could be the possible positive triggers for the automotive stocks at this point of time and what lies ahead for them? Within the automotive sector, which are the companies that are expected to shine and should one invest in automotive stocks? The answers to all these pertinent questions lie in observing the trend and on-ground development happening in the electric vehicle (EV) space.

It is a known fact that the markets are going to be flooded with EVs in the coming years. What is not known is which company or a set of companies is ahead in the race of ‘adoption of new technology and which companies are gaining market shares amidst the heightened uncertainties. For investors choosing to invest in automotive stocks, the much-required clarify is not there yet. However, one school of thought suggests that by the time there is clarity the stock prices may have already gained weight. The way the dynamics are placed for the automotive sector, it looks like the pay-off could be above average if one is able to identify a winner in the sector that will be able to gain market share.

Indian Automotive Industry

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