“The automobile business is truly an emotive and tremendously rewarding business. It has more excitement than any other business. I’ve been involved in.”
These are the words said by Mr. Ratan Tata during his speech on Indian Car Industry. The automobile industry gave fruitful returns in the past and turned many car manufacturers into industry giants, but the economic slowdown due to multiple reasons really affected this Industry, especially in the last 3 - 5 years. On the other hand, EVs are considered to be the future of this industry, so a big question arises, is this industry worth investing in? Will EVs be able to charge the portfolios of Investors? Well, a lot of questions are there, and therefore, we have curated a list of the top 5 automobile stocks which are considered as big giants of this industry.
India’s automobile industry was the fifth-largest market in the world in the year 2020. Due to the increasing population of the country, there is a surge in the demand in the two-wheeler segment. In the past 4 years, domestic automobile production has grown at a CAGR of 2.36%. Various auto companies have expanded their operations internationally in the past few years. It is expected that India will become the 3rd largest automobile player in terms of volumes by the end of 2026.
Factors complementing the Industry
There has been a continuous increase in Indian automobile exports. Apart from this, the rise in income of the young population and the middle class is boosting the demand for vehicles in the economy. Apart from this, the industry is getting FDI inflows and even the government of India is investing continuously in this sector. The announcement of a scrappage policy for old vehicles also contributed to the surge of demand for the vehicles. There has been a significant increase in the research and development hubs in the industry. Around 8% of the country’s R&D spend is on the automobile sector.
There has been a positive impact of GST on this sector as the overall cost structure of the industry has been reduced. Apart from this multiple efforts and initiatives are being taken by the companies and the government to create the proper infrastructure for electric vehicles in the country. To encourage individuals to replace their old vehicles with new ones, the government is providing discounts and tax benefits to the individuals under the voluntary vehicle fleet modernization program (V-VMP). India is also planning to reduce its carbon emissions which leads to the promotion of the usage of electric vehicles.
Factors to consider while selecting the automobile stocks
As we know that this industry is cyclical in nature and goes in tandem with economic growth. One should keep in mind the condition of the economy while investing in this sector. One should focus on the companies which are good at dealing with this cyclicity of the industry and able to minimize their costs to reduce the volatility and adverse impacts. After that, one should consider the fundamental performance of the stocks, whether they are able to earn continuous returns and if there is any consistency in its performance.
Apart from this, the automobile industry is an interest-rate-sensitive sector. One needs to check upon the actions of the government before investing in the segment. As the reduction in rates by RBI will provide more lending opportunities in this segment. Further on, one should analyze the qualitative factors like market penetration, Capex requirements, capital availability, tech-savvy companies, etc.
Under the financial ratios, the investors should look specifically for the debt to equity ratio. Being a capital-intensive industry, investors should invest in companies with lower debt-to-equity ratio compared to the industry levels. Another important ratio to be considered in this segment is the inventory turnover ratio. This ratio tells how frequently the company is able to sell off its inventory in a year. The investor should prefer the higher ratio as it shows how efficiently the company is able to manage its inventory.
Top 5 Auto stocks in India
We have curated a list of the top 5 auto stocks. These are the big names in the Indian auto industry that have provided remarkable returns for generations. Even though the space is facing issues in terms of growth for the last few years, but with the emergence of EV's the sector is expected to take a positive turn.
Maruti Suzuki has been a market leader in the passenger car industry. The main objective of the company is to provide the comfort of 4-wheelers to the middle-class income group of India at a reasonable price. It deals with buying and selling motor vehicles, spare parts as well as its elements. The company’s main focus is to reduce the cost and to make the manufacturing process more flexible.
The company is specifically engaged in the manufacturing of commercial vehicles and their engineering parts along with motorcycles. It is the producer and owner of the iconic brand of motorcycle known as Royal Enfield. It has a strong brand image due to its high-quality standards. As the company mostly caters to the premium segment, it enjoys a monopoly as nobody is currently planning to enter this segment. But it also gets affected by adverse economic conditions operating in the premium segment.
The company is a leading player in the market. It offers a diversified portfolio of passenger cars, commercial vehicles, defense automobiles, sports vehicles, and many more. It operates in multiple nations managing a strong international network of subsidiaries. Tata Motors has a stronghold and leadership position in the commercial vehicle segment being the largest manufacturer of compact mid-size utility vehicles.
This company has remained the leader in the two-wheeler segment for consequently many years. It was the first to enter and capture the rural market of the country by launching economical two-wheelers. Though the company does not have a stronghold in the international market as its exports consist of only 3-4% of its total sales. It has also collaborated with Harley Davidson to sell some premium products in the Indian market.
Mahindra & Mahindra Ltd.
M&M Ltd. is the flagship company of the Mahindra conglomerate. The company has been the highest revenue earner in this industry. It operates in sales of automotive and its spare parts in domestic and international markets. Apart from this, it deals in segments like the farm equipment segment, leasing of tractors, and other automotive components to name a few.
The companies mentioned above are our top 5 picks which we believe are going to perform well in the coming months because of good monsoon and multiple government initiatives. Though one should also look upon the risk and challenges the sector is going through and consider their risk appetite whether to invest in this sector or not. It is suggested that one should consider both qualitative and quantitative analysis before investing in any stock. Apart from these 5 companies, which auto stock is on your portfolio list? Do let us know in the comment section!
*Disclaimer: The stocks discussed above aren't recommendations from Finology; they are only picked to make you understand the concept.