InvestorQ : Do you see the auto companies like Maruti and M&M benefitting from lower prices of steel?
vaishnavi mhatre made post

Do you see the auto companies like Maruti and M&M benefitting from lower prices of steel?

vidhya Laxmi answered.
8 months ago

In the last few months, one sector has shown strength even as most of the other sectors are under tremendous pressure. Just look at the numbers. While most of the sectors on the NSE are trading very close to their yearly lows, auto is one sector that is trading around 19% above its yearly lows. What is it that has put automobiles in a special sweet spot.

There are several reasons why autos find themselves in a sweet spot. The answers pertain to an improvement in input costs, reduction in the supply chain constraints, a small boost to regular demand and an upcoming boost to renewable demand. Let me talk about the input costs first. The biggest item of cost for the auto sector is steel and the steel prices are down nearly 20% from their peaks. That translates into 400-500 bps margin improvement.

There is also a demand side story. A good monsoon, as projected by the Met Department, will boost the farm demand for two wheelers and entry level cars. Even tractors and CVs see higher demand. In addition, the demand for EVs is expected to pick up as digital companies try to reduce their carbon foot print in a business that is becoming extremely delivery oriented across India. That could be a big boost for EV demand.

Finally, the big challenge in the last few years has been the pressing shortage of microchips. Supply has just failed to keep pace with demand and capacities are hard to come by. That is finally changing after a hiatus of more than a year. While full resolution will take over a year, auto companies are at least able to lock in secured sources of chip supply. That is a big sentimental booster for auto stocks.