What has driven the superior performance of the automobiles sector in last few weeks?

The big story in the stock markets in the last few weeks has been the smart outperformance of the auto stocks in general and the auto index in particular. There are stocks like Mahindra & Mahindra and Tube Investments of India that have been trading at their life-time highs. However, this rally is across the board and the rally is anywhere to the tune of 20-40% in a very short span of just about 3months since the current financial year began. At a level of 27,781, even the BSE Auto index is trading higher than it was in November 2021.

What explains this incredible performance of the auto index in India. Just consider the data for FY23 till date. For the period from April 2022 to early July 2022, the BSE Auto index has outperformed the Sensex by a huge margin. For instance, while the BSE Automobile index has appreciated by 15.5% in FY23 till date in the last 3 months, the benchmark Sensex was actually down 7.6%. If you look at that in relative terms, then the auto index has actually outperformed the Sensex by more than 23%, which is a huge gap created.

The rally and the feel-good factor is rampant across the auto sector. Across the auto space, most of the heavyweights have done extremely well. For instance, there are the stocks like M&M, Eicher Motors, TVS Motors, Ashok Leyland and Hero MotoCorp that have rallied anywhere between 16% and 37% in a span of just about 3 months. What is really interesting and also intriguing is that these auto stocks have been under pressure even before the pandemic i.e. almost since 2019 when the first signs of auto slowdown was visible.

Several triggers have caused this sharp rally in auto stocks. Robust monsoon have a direct bearing on rural income levels and therefore on rural demand. This year, once again, the bet is on record Kharif output, although the start has not been too encouraging. This is generally positive for sectors like tractors, commercial vehicles, two wheelers and also for entry level passenger cars. Many of these segments typically witness cyclical demand wherein the demand surge comes around the Kharif period and later again during the festive season.

But, the big reason favouring auto stocks is improved affordability. Two rounds of cuts in the excise duties on petrol and diesel have eased household budgets and been a boost for auto demand. It reduces the running cost of automobiles and is further supported by falling crude oil prices globally. In addition, the sharp fall in steel prices reduced the cost of auto manufacturing. Also, the auto companies are seeing supply chains improving and the chip availability improving meaningfully. The hope is also that central banks will tame rates.

There is already a positive outlook for auto sector in the FY23 period. The expected volume growth for the various components of autos in FY23 is as under: 20% for commercial vehicles (CVs), 20% for passenger vehicles (PVs), 11% for two-wheelers and 4% for tractors. Positive traction is most visible in light commercial vehicles (LCVs) and passenger vehicles (PV). For now, the focus is on how much the Kharif output is able to benefit from the higher MSPs being offered to farmers. That still remains a debatable question.