The shifty gears of Auto Stocks

India’s automotive industry has been a critical contributor to the growth of the Indian economy, besides facilitating the basic mobility of Indians. The auto sector also generates export revenues and has depending on it numerous other M/SMEs that operate in the auto ancillary and metals industry. In fact, the broad participants include not just vehicle/parts manufacturers & suppliers/dealers, but also ancillary industries, financial intermediaries, the Government, and even us, the end-consumers!

But despite how ingrained the industry is in our everyday lives, things haven’t been going great for it off late.

Dismal 2018-2019 for Auto Stocks

Since late 2018, there’s been growing clamour surrounding the slowdown in the auto sector. What was initially believed to be a cyclical downturn that reduced demand, gradually got aggravated. By mid-2019, the issues faced by the auto sector ranged from inventory backlog, production cutbacks, labor problems, liquidity crunches, reduced investment spending, and cases of employee retrenchment. 

There are multiple reasons behind this slump:

• Vehicle affordability issues: the slowing domestic economy resulted in less disposable income in the hand of consumers for expensive purchases like cars
• Regulatory changes: the constant push/pullback on BS-VI compliance by 2020 created a lot of uncertainty & resulted in auto makers putting brakes on many new launches. The guideline & official outlook on the transition from internal combustion engines (ICEs) to Electric vehicles (EVs) also got delayed & added to the confusion. Even the updated Motor Vehicles Act, which significantly increased the fines/penalties for road violation deterred many customers
• GST: another key character in the auto-sector saga is the uncertainty created by the relevant authorities on the GST that will be ultimately charged on automobiles, resulting in many customers delaying their purchase for months since they anticipated a reduction in the applicable GST
• Global factors: a general trend of muted consumption across the world also impacted the bottomline of many manufacturers like Maruti-Suzuki, Tata Motors’ JLR, etc. which receive significant revenue contribution from exports

Some relief, much wanting

Industry leaders had been calling on the Government to bring clarity on its various policies, and also provide relief to the ailing sector. Finally, in August 2019, the Finance Minister unveiled a stimulus package that was designed to boost demand for the auto sector. Its highlights included:

• BS-IV vehicles purchased up to March 2020 would remain operational for the entire period of registration
• The government allowed an additional 15% depreciation, taking the total 30%, on all vehicles acquired until March 2020
• The revision of one-time registration fees, which was set to increase, was postponed until June 2020
• The Centre also lifted its ban on purchase of new vehicles for replacing all old vehicles by government departments, instead saying it would consider various alternative measures that would boost demand

One of the most contentious points – and possibly one that could’ve driven a significant shift in sentiment – was however ignored by the Government. The GST rate for automobiles was still left at 28% when the GST Council met in September 2019.

What lies ahead in 2020?

The new year had started on a very positive note for the auto sector, with demand finally picking up & electric vehicles also becoming increasingly popular. The last 3 months had also seen the stock prices of key players in the CNX Auto index rise steadily in anticipation of changing fortunes for the industry:

But just as sentiment was improving came Budget 2020 – and it didn’t really provide much relief to the ailing sector. And industry reports started forecasting that the troubles of the auto sector were quite deep-rooted to go away quickly on their own, i.e. without Govt. support. As such, on 3rd March 2020, a Parliament-appointed panel made recommendations to the Government – amongst the suggested measures was the reduction in GST rates until such time the sector stabilises.

Unfortunately, soon after the entire world finally woke up to the threat of coronavirus – to human lives, to entire nations & economies, to society itself. Naturally, the problems of the auto sector took a back seat. Financial markets have been thrown in a tizzy since then, and along with it have also crashed the prices of the auto stocks.

Until such time the threat of the virus is contained, the economic conditions will only worsen – and stock market will continue to remain volatile while it collectively tries to anticipate the future. But once the dust settles down – and this too shall pass – it’s likely that the stock markets will quickly rebound thanks to all the rate-cuts & increased liquidity injected in the financial system.

“The automobile industry in India is one of the largest and fastest-growing sectors and constitutes 27% of industrial GDP & 49% of manufacturing GDP. It provides about 37 million direct & indirect jobs and 15% of total GST collection amounting to Rs 1.5 lakh crore.”

Source: The Economic Times, 3rd March 2020

With so much depending on the auto industry, it’s a sector that might be given extra attention from the Government in an attempt to jumpstart the economy once the coronavirus crisis has been contained. Since the Govt. will also be trying to spur consumption, we might even see auto loans becoming much cheaper then.

The other thing the auto industry has going for it is the charge of electric vehicles (EVs). After years in the making, the EV ecosystem is coming to fruition & finally has a lot going for it. Its growth will also provide a much-needed boost to key players in the auto sector, and perhaps even be a watershed moment for the entire auto industry.

If and when you think that auto stocks might make a good investment, check out the Auto Tracker smallcase – this portfolio consists of automobile & auto parts manufacturers, battery makers, and tyre companies to allow investors to efficiently track & invest in the auto sector. Stocks like TVS Motor Company, Sundram Fasteners, Hero MotoCorp are currently part of this smallcase. As of March 2020, the Auto Tracker smallcase had ~20% allocation to large-cap stocks, ~50% to midcap stocks, and the remaining to smallcap stocks.

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Are you interested in Electric Vehicles? Read this blogpost to find out the history of the EV ecosystem & why it’s now ready to charge ahead!