InvestorQ : Why have auto stocks done so well in the recent past?
Arusha Ray made post

Why have auto stocks done so well in the recent past?

2 months ago

The one sector that has stood out like a bright spot in a dour market is the auto sector. It sounds surprising, but that is the one sector that has been among the best performers from the lows of the year. During the last week ,the auto index touched a 7-month high and it has rallied a full 28% to the current levels from the lows in a span of just about 3 months. The biggest gainers from the lows have been names like Mahindra & Mahindra, TVS Motors and Tata Motors which have gained more than 50% in a short span of time since March 2022.

Several reasons can be attributed to this surge in auto stocks in the last 3 months, but 3 principal reasons really stand out in favour of the auto stocks. Let us look at each of them.

a) The one big challenge in the last two quarters was the sharp spike in the cost of inputs like steel, which forced most of the auto companies to pass on the burden to the customers in the form of price hikes. The cost spike was badly hitting the operating margins of these companies and price hikes could only compensate for the fall sales, not for the fall in profits. That is changing with the commodity prices peaking out.

b) A major X-factor for the auto sector was the rural demand, which had fallen sharply in the last few months. The reason was lower income levels in rural areas and higher rural inflation resulting in less purchasing power. IT saw a lot of demand damage and entry level auto producers were among the worst impacted by this trend. Things are likely to change for the better with a normal monsoon predicted and a record Kharif harvest expected. This is likely to boost rural demand and be conducive for stocks like M&M, Bajaj Auto, Escorts, Hero Moto etc.

c) Finally, the issue of chip shortage has been effectively handled, or you can say it has been mitigated. In last 2 years, supply of microchips may have failed to keep pace with the demand leading to severe shortages of microchips. The scenario is changing. Most auto makers now have a better hang of chip supplies have also made alternate vendor arrangements.

Let us not forget that there is also the affordability issue. With crude prices peaking out and the government cutting excise duties on petrol and diesel, apart from importing cheap Russian crude, it is making vehicles more affordable. That is likely to make a big difference to the entry level market.