Will Automotive Stocks Change From Slow Lane To Fast Lane?
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
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 Rs 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 Rs 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 the 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
India’s automotive industry is finding it tough to remain in a positive territory after growing at above 10 per cent in the early 2010s. Observing the last two fiscals i.e. FY20 and FY21, the total automobile sales in India have plunged in double-digits. The fall in vehicle sales can be attributed to a bunch of factors such as new safety and environmental regulations, high GST rate, liquidity crunch after the NBFC crisis and successive fuel price hikes along with falling economic activity. According to data presented by the Society of Indian Automobile Manufacturers (SIAM), the CAGR of the Indian automobile industry has dipped to negative 1.9 per cent from FY16 to FY21 from 5.7 per cent registered from FY11 to FY16.
During the fiscal year 2019-20, the sector reported an 18 per cent drop in sales to 2,15,48,494 units on a YoY basis while in FY21 sales dropped further 14 per cent standing at 1,86,15,588 units. During this economic slowdown, numerous norms were implemented in India by the regulators to enhance the safety aspect of vehicles and reduce harmful carbon emissions.
The Battery Pack
Hero Motors
The company is said to have planned to launch its first batterypowered two-wheeler by March 2022. The electric scooter that is being developed independently by Hero Motors is expected to help the company gain some market share. The second electric scooter is expected to be launched in the second half of the next year with the help of Taiwan-based EV manufacturer Gogoro.
Amara Raja Batteries
The company has announced plans to invest about USD 1 billion in capital expenditure over the next 5-7 years. It is expected to largely use the investment for a 10-12 GWh (gigawatt hours) lithium-ion battery facility under the Advance Chemistry Cell (ACC), PLS scheme of the government.
Exide Industries
The company has plans to set up Tesla-style factory for lithium-ion batteries in the near future using the government’s production linked incentive (PLI) scheme. Exide is also planning to launch its lithium-ion battery assembly factory in Gujarat by the end of financial year 2022.
Tata Power
Tata Power has partnered with Macro Tech Developers (Lodha Group) to provide end-to-end EV charging stations in all residential and commercial projects across Mumbai and Pune. Under the partnership, Tata Power is expected to install EV charging stations at Lodha Group’s developments. Tata Power has deployed EV charging solutions in over 40 cities across India so far including Delhi, Mumbai, Bangalore, Hyderabad, Pune and Chennai. Recently, TVS Motor Company, one of the leading manufacturers of two-wheelers and three-wheelers globally, entered into a strategic partnership with Tata Power. As part of the MoU, the two companies have agreed to drive the comprehensive implementation of electric vehicle charging infrastructure across India and deploy solar power technologies at TVS Motor Company’s locations. The partnership aims to create a large dedicated electric two-wheeler charging infrastructure to accelerate electric mobility in India.
Tata Chemicals
Tata Chemicals in the meantime has launched a lithium-ion battery recycling initiative as a part of its commitment to sustainability. Tata Chemicals aims to recycle 500 tonnes of used lithium-ion batteries to recover valuable metals such as lithium, cobalt, nickel and manganese.
Though these steps suited well for consumers and the overall nation, it did qualify as a big setback for the automotive industry, leading to steep hike in automobile prices.
Government Initiatives
Over the past few months, the environment has turned more favourable for the EV industry, especially for two-wheeler EVs. With the kind of subsidies being announced (up to Rs 45,000-60,000 per scooter), the effective price is now low by almost 40 per cent for EVs, at par with the ICE vehicles. The new products that are being launched in the EV space are an improved version, available with over 100 km range on a single charge. Talking about products, Ola’s models offer a driving range of 121-181 km. With the subsidies being provided by the government for EVs and a visible improvement in the product offerings, the automotive industry is aiming at about 10 per cent electric sales by 2026.
"The one factor that you can't find on a spreadsheet is the willingness of the people in government to lead change, And in Denmark every single one of them is engaged and willing to do whatever it takes to get Denmark to be a leader in electric vehicles."
- Shai Agassi
"Electric cars are not going to take the market by storm, but it's going to be a gradual improvement."
- Carlos Ghosn
The demand for sustainable solutions is increasing and the government’s focus on evolving policies that favour greener transportation alternatives is expected to benefit the automotive industry. Meanwhile, there is lot of anxiety amongst consumers on the range of the battery. However, with the better and improved battery technology, these concerns are being addressed effectively. With the problem of range being addressed when one considers the scaling of charging infrastructure across states, we are talking about rapid adoption of the EVs in the coming years.
The Nifty Auto index had gained 149 per cent from the March 2020 lows to February 2021 highs. After registering a high of 11,093.15 in the month of February 2021, the index underwent a shallow retracement of around 24 per cent of the sharp 46-weeks up-move from March 2020 lows to February 2021 highs, which is highlighting robust price structure.
Interestingly, the last 34-weeks of price action has taken a shape of a triangular pattern and the index is on the verge of a breakout of this 34-weeks long triangular pattern. The weekly MACD line has witnessed the crossover of a signal line above the zero line, which is one of the most bullish signals. The weekly RSI has entered into a bullish zone, thus supporting the positive bias.
Conclusion
The automotive sector is shedding its old skin and attempting to wear a new skin. However, in this process the investors’ holding listed automotive stocks have had to undergo several years of underperformance. The long tenure underperformance has ensured that the automotive stocks are under-owned and clearly have not participated in the stellar rally witnessed in all the other sectors since the market bottomed out in March 2020. The very reason that the automotive stocks are under-owned and have underperformed when compared to their high beta peers in financials and metals is making automotive stocks attractive for value investors.
Those investors betting on the sector are essentially betting on the new technology that is environment-friendly. The question that investors need to ask is which automotive company is ahead of the curve and whether adopting the technology will lead to profits for the whole sector. For sure the demand scenario is improving for automobiles. The improving demand environment augurs well for the sector but supply issues are plaguing the industry. The chip issue has especially been highlighted by leading automotive makers as the key reason for not being able to produce more. The growth is clearly hampered. Once the chip-related issue is resolved, investors can look at some positivity in the automotive stocks. When it comes to two-wheelers the industry is not impacted by chiprelated issues; however, the demand environment is challenging.
Because of these prevailing issues, investors as of now investors are not aggressively betting on automotive stocks. One area that looks promising is that of battery makers and raw material providers to electric vehicles. As the demand for the electric vehicles will improve, the demand for raw material such as silicon carbide required for semiconductors will also see an uptick. Two companies that immediately to mind with reference to silicon carbide are Grindwell Norton and Carborandum Universal. Both are a proxy play on electric vehicles and semiconductors and they manufacture silicon carbide.
Several global players are seen shifting from silicon to silicon carbide as semiconductors made of silicon carbide process electricity more efficiently than traditional semiconductors in some important applications. The new technology is appealing for electric car manufacturers owing to silicon carbide semiconductors and improved battery control helps save energy, greatly increasing the range of electric cars. Silicon carbide-based semiconductors enable faster recharging as well. Silicon carbide contains silicon and carbon and is the world’s third-hardest substance.
Advance technology is required to process silicon carbide and it is preferred over silicon due to the stability of the material and other properties that allow chip-makers to cut energy loss by more than half compared with the normal silicon wafers. Tesla was the first global automotive maker to use silicon carbide and has proven to be a catalyst for this change. In fact, it has become the first US automotive maker to use silicon carbide chips in a mass-produced car. Such growth opportunities are thrown at investors owing to the advent of new technology and disruption in the industry. Investors to cash in on the change in trend in the automotive sector will have to take a holistic view on the sector and look beyond the traditional automotive makers.